Boiling Banks - How Heat Harms Bank Performance

Abstract

In the face of rising temperatures and increasingly extreme weather events, we examine how heat affects commercial bank performance. We exploit an institutional setting in Germany, which limits the operations of small and medium-sized banks geographically, to identify the regional effect of high temperatures. Our results are based on daily and hourly weather station observations and show that heat significantly reduces the profitability of regional banks. Further analyses taking into account the composition of the local economy suggest that the decline in performance is caused by the reduced productivity of bank clients. The results propose that physical climate risks threaten the business model of local banks, endangering financial stability at large.

Keywords: Heat Stress, Climate Finance, Commercial Banking, Bank Performance