Climate Risk and Financial Stability: Evidence from Syndicated Lending

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