The impact of climate change on banking systemic risk

Given the influence of climate change, there is an urgent need to discuss how commercial banks can strengthen their risk management strategies to cope with climate change. Using quarterly panel data of 16 listed commercial banks in China, this study examines the impact of climate change on banking systemic risk from both theoretical and empirical perspectives. It focuses on two path mechanisms through asset volatility and credit quality as well as the heterogeneity of effects. The study finds that (1) climate change will significantly increase the level of bank systemic risk spillovers and non-state-owned commercial banks are more affected than state-owned commercial banks; (2) asset volatility and credit quality mediate how climate change affects banks’ systemic risk; and (3) the influence path of climate change on the systemic risk of state-owned commercial banks is “climate change—asset volatility – credit risk—systematic risk.” However, the mediating effect of asset volatility on non-state-owned commercial banks is not significant, whereas credit quality shows a partial mediating effect. Accordingly, this study advances policy suggestions on strategic management, interventions, and the risk prevention system for banks’ climate risk from the perspectives of macro-prudential regulation and micro-risk management.