Climate risk and bank stability: International evidence

• Published in: Journal of multinational financial management 2023-12, Vol.70-71, p.100824, Article 100824
• Main Authors: Le, Anh-Tuan, Tran, Thao Phuong, Mishra, Anil V.
• Format: Article
• Language: English
• Subjects: Bank stability; Bank supervision and regulation; Climate risk; Institutional quality
• ISSN: 1042-444X
• DOI: 10.1016/j.mulfin.2023.100824

The paper studies the association between climate risk and bank stability. Using an international sample of 6433 commercial banks in 109 countries between 2005 and 2019, we illustrate that increased climate risk leads to decreased bank stability. These findings are robust to alternative bank stability measures and after controlling for endogeneity by an instrumental variable and system GMM approach. Further analysis shows that the negative impact of climate risk on bank stability is more pronounced in small banks and banks that have low capital. In addition, we also find better institutional governance, bank supervision, and regulations can eliminate the adverse impact of climate risk. Our results are neither determined by the effect of the financial crisis nor by the heterogeneity of different regions. Overall, our findings add a novel determinant of bank stability globally. •This paper investigates the impact of climate risk on bank stability worldwide.•An increase in climate risk is associated with a decline in bank stability.•Our findings are robust to alternative bank stability measures and various other governance measures.•Our findings alleviate concerns about endogeneity by an instrumental variable and system GMM approach.