Climate Change and Bank Default

54 Pages Posted: 19 Feb 2024 Last revised: 22 May 2024

See all articles by Yuna Heo

Yuna Heo

University of Basel - Faculty of Business and Economics; Swiss Finance Institute

Date Written: February 11, 2024

Abstract

This study investigates the impact of climate change on bank defaults. Using a novel bank-level measure of climate change, we find that climate change increases the probability of bank default. The effect is more pronounced for banks with a higher exposure to climate disasters and higher loan portfolio synchronicity. The detrimental impacts are amplified for banks experiencing deposit withdrawal. Further, we find that climate adaptation policy can lessen bank default risk due to climate change. Our results are robust to using an instrumental variable approach and to using alternative measures. Overall, our findings provide suggestive evidence that climate change exacerbates financial instability, but adaptation strategy could build resilience to adverse impacts caused by climate change.

Keywords: climate change, financial stability, bank default risk, climate adaptation, climate resilience, bank fragility, distance-to-default, bank default probability

JEL Classification: G15, G32, G38, Q54

Suggested Citation

Heo, Yuna, Climate Change and Bank Default (February 11, 2024). Available at SSRN: https://ssrn.com/abstract=4722776 or http://dx.doi.org/10.2139/ssrn.4722776

Yuna Heo (Contact Author)

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

Peter-merian Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://sites.google.com/view/yunaheo

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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