Climate Change, Bank Fragility, and Systemic Risk

60 Pages Posted: 11 Dec 2022 Last revised: 1 Mar 2023

See all articles by Yuna Heo

Yuna Heo

University of Basel - Faculty of Business and Economics

Date Written: December 10, 2022

Abstract

We examine how climate change affects bank fragility. We find both physical and transitional climate changes lead to substantial increase in systemic risk. The effect is more pronounced for banks with higher climate change exposure, higher loan portfolio synchronicity, and higher bank default probability. Our results are robust to using an instrumental variable approach and to using various alternative measures. Further, exploiting staggered adoptions of climate change adaptation across states, we find that climate adaptation actions lessen systemic risk due to climate change. Our findings provide suggestive evidence that climate change exacerbates financial instability, but adaptation can build resilience to climate impacts.

Keywords: climate change, financial stability, systemic risk, bank default risk, climate adaptation, climate resilience, bank fragility

JEL Classification: G15, G32, G38, Q54

Suggested Citation

Heo, Yuna, Climate Change, Bank Fragility, and Systemic Risk (December 10, 2022). Available at SSRN: https://ssrn.com/abstract=4299149 or http://dx.doi.org/10.2139/ssrn.4299149

Yuna Heo (Contact Author)

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

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