Climate Change and Bank Default

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