Climate Change Shocks and Credit Risk of Financial Institutions: Evidence from China’s Commercial Banks

ABSTRACT

As global climate risk is looming in recent years, the climate risks faced by financial institutions are also increasing. Effectively quantifying and assessing climate-related financial risks is of great significance for financial institutions to establish risk management mechanisms. Accordingly, choosing Chinese commercial bank data from 2007 to 2019, this paper quantitatively evaluates the influence of climate change shock on the banks’ credit risk by taking the annual temperature fluctuation in cities as the core index to characterize the climate change degree. It is found that annual average temperature rise can significantly increase the credit risk level of commercial banks. Heterogeneity analysis indicates that small-scale banks, rural commercial banks, and commercial banks with higher marketization levels are more sensitive to climate change. Further analysis shows summer and autumn temperature changes have the most prominent impact on banks’ credit risk. Moreover, there is no obvious nonlinear relationship or lagged effects between annual temperature change and banks’ credit risk in our dataset.

KEYWORDS:

• Climate change
• Credit risk
• Commercial banks
• Financial risks

JEL:

• G21
• Q14
• Q01

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors acknowledge financial support from the National Natural Science Foundation of China (72073010, 72321002), Science and Technology Program of Zhejiang Province of China (2022C35060), the Technology Innovation Program of Beijing Institute of Technology (2022CX01013, 3210012212330) and the Joint Development Program of the Beijing Municipal Commission of Education. The usual disclaimer applies.