Climate Risk and Financial Stability: Evidence from Syndicated Lending

58 Pages Posted: 18 Feb 2024 Last revised: 2 Apr 2024

See all articles by Thomas Conlon

Thomas Conlon

University College Dublin

Rong Ding

NEOMA Business School

Xing Huan

EDHEC Business School

Zhifang Zhang

Warwick Business School

Date Written: April 27, 2024

Abstract

We study the impact of unexpected climate shocks on banks' individual and systemic risks. Employing climate risk measures developed using the Billion-Dollar Weather and Climate Disasters data from the National Oceanic and Atmospheric Administration (NOAA) and Dealscan syndicated lending data, we find that climate risk exposure acquired through cross-state lending increases banks' individual and systemic risks. We also find that bank profitability helps offset some of the adverse effects of climate risk. Banks reduce lending and increase loan loss reserves after the experience of an unexpected climate shock. The loan-level analysis reveals that the effect of climate risk exposure on bank risks is more pronounced for loans granted for operating and capital expenditures. We contribute to a growing literature on the impact of climate risk on financial stability and the development of robust measures of climate risk for banks.

Keywords: bank lending, climate change, climate risk, financial stability, systemic risk

JEL Classification: G20, G21, G30, G32, N20

Suggested Citation

Conlon, Thomas and Ding, Rong and Huan, Xing and Zhang, Zhifang, Climate Risk and Financial Stability: Evidence from Syndicated Lending (April 27, 2024). Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 24-2; European Journal of Finance, 2024, Available at SSRN: https://ssrn.com/abstract=4711995 or http://dx.doi.org/10.2139/ssrn.4711995

Thomas Conlon

University College Dublin ( email )

Smurfit Graduate Business School
Blackrock
Co. Dublin, n/a
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/drthomasconlon/

Rong Ding

NEOMA Business School ( email )

1 RUE DU MARECHAL JUIN-BP215
MONT-SAINT-AIGNAN CEDEX, 76825
France

Xing Huan (Contact Author)

EDHEC Business School ( email )

393 Promenade des Anglais
Nice, Provence-Alpes-Côte d'Azu 06202
France

Zhifang Zhang

Warwick Business School ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

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