The Impact of Extreme Climate on Commercial Banks' Risk-taking: Evidence from Local Commercial Banks in China
PAN Min, LIU Hongyan, CHENG Zishuai
Center for Economic Development Research, Wuhan University; Economics and Management School, Wuhan University; School of Finance, Shanghai University of Finance and Economics
Summary:
In recent years, global warming has led to a significant increase in the frequency of extreme climate events, and the ecological environment on which human beings depend is facing a great threat. China is one of the countries seriously affected by extreme climate events. The frequent occurrence of extreme climate events not only brings severe challenges to the natural ecology and economic development but also transmits the impact of these events on the real economy to the financial system, affects financial stability, and becomes an important source of systemic financial risks. The Chinese government attaches great importance to addressing climate change and its related financial risks. On September 22, 2020, China announced its carbon peak and neutrality goals (dual carbon goals) at the United Nations General Assembly. In addition, the People's Bank of China actively organized climate risk stress tests and used the green credit performance evaluation of financial institutions as one of the important bases for macro-prudential assessment and the rating of financial institutions. Climate-related financial risks are physical and transition risks. Although in the long term, we need to pay close attention to the impact of transition risks, in the short term, we should pay more attention to the physical risks caused by affected subjects' loss of assets. At the same time, due to the high degree of uncertainty in the evolution of climate change and the emergence of extreme situations, the interaction mechanisms between climate change and the financial system are very complex. Identifying and assessing physical risks has become one of the challenges for financial institutions in coping with climate-related financial risks. At present, the Chinese financial system is dominated by indirect financing led by commercial banks. Extreme climate may increase banks' risk-taking and further endanger the stability of the financial system. Therefore, in the context of striving to achieve China's dual carbon goals, discussing the impact of extreme climate on banks' risk-taking in China is not only conducive to providing empirical evidence and theoretical references for commercial banks to identify and prevent physical risks, but is also of practical importance for building a macro-prudential management system to manage climate-related risk, prevent and control systemic financial risks, and coordinate development and security. This paper empirically examines the impact of extreme climate on banks' risk-taking and the mechanisms of this impact by taking 281 local commercial banks in China from 2004 to 2018 as the sample and using the annual number of extreme climate days as the proxy for extreme climate. Additionally, this paper tests the moderating effects of extreme climate prevention and mitigation measures and bank risk management on the relationships between extreme climate and banks' risk-taking, and the heterogeneity of these effects due to the different service objects of local commercial banks. The results show the following. First, while extreme precipitation significantly increases banks' risk-taking, extreme high and low temperatures have no obvious impact on banks' risk-taking. Second, extreme precipitation mainly affects the quality of banks' credit assets and the probability of default by bringing economic losses to banks' credit subjects, which in turn affects banks' risk-taking. Third, improving the level of pre-disaster insurance protection, increasing the intensity of carbon emission reduction, and ensuring adequate bank capital are all conducive to alleviating the negative impact of extreme climate on banks' risk-taking. Finally, compared with local commercial banks that mainly serve urban industrial and commercial groups and households, extreme climate will have a greater impact on the risk-taking of local commercial banks in counties that mainly serve the rural sector. The contributions of this paper are as follows. First, it contributes to the literature on climate-related financial risks by theoretically analyzing the mechanisms through which extreme climate affects banks' risk-taking and showing evidence of the impact of extreme climate on banks' risk-taking based on local commercial banks in China. Second, from the perspective of insurance guarantees, carbon emission intensity, and bank risk management, this paper investigates the moderating effect of relevant institutional arrangements on the impact of extreme climate on banks' risk-taking and provides a theoretical and empirical basis for policy formulation in the process of achieving China's dual carbon goals. Finally, we analyze the heterogeneity based on the differences in business scope and service objects of different local commercial banks, and provide a theoretical reference for Chinese local commercial banks to formulate differentiated policies and measures to deal with climate-related financial risks.
潘敏, 刘红艳, 程子帅. 极端气候对商业银行风险承担的影响——来自中国地方性商业银行的经验证据[J]. 金融研究, 2022, 508(10): 39-57.
PAN Min, LIU Hongyan, CHENG Zishuai. The Impact of Extreme Climate on Commercial Banks' Risk-taking: Evidence from Local Commercial Banks in China. Journal of Financial Research, 2022, 508(10): 39-57.
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