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| Marching Against the Wind: Typhoon Disasters and Banks' Risky Behaviors |
| LV Yongbin, LI Zhisheng, GUO Yichen
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| School of Finance, Zhongnan University of Economics and Law; School of Finance, Southwestern University of Finance and Economics |
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Abstract Climate change has become a major challenge to all of humankind, with profound impacts on the financial and economic system. As an extreme weather event occurring with high frequency and intensity, typhoons not only cause great damage to economic activities but also have a powerful impact on the financial sector, which in turn triggers a series of chain reactions and feedback behaviors. The literature on the impact of typhoon disasters on banks' risk behavior is still insufficient. Researchers face certain difficulties when applying existing climate risk indicators to study typhoon disasters. Additionally, the literature on typhoon research has tended to focus on the post-disaster resumption problems of real enterprises and the operation of the capital market, with less research on the impact on the banking sector, which is an important participant in economic operations. China's financial system is still dominated by the bank-led indirect financing system, and commercial banks are the first to bear the brunt of climate disasters.
In view of this, this paper empirically examines the impact of typhoon disasters on banks' risk behavior by taking 295 local commercial banks in China during 2010-2019 as research objects, matching the operational data of 3452 A-share listed companies, and combining these with the Holland wind field model to calculate a typhoon destructive power index at the city level. The paper also examines the mediating effects of corporate total factor productivity and corporate fixed asset losses, and it further analyzes the resulting series of chain reactions and feedback behaviors, including changes in banks' risk appetite and credit decisions. This paper's empirical analyses yield several findings. First, typhoon disasters significantly raise banks' non-performing loan ratios (NPLRs) and increase banks' credit risk, and they raise banks' NPLRs significantly more in coastal areas than in inland areas. Second, the rise in corporate fixed asset losses and the decline in corporate total factor productivity levels are important channels through which typhoon disasters affect banks' NPLR ratios. Third, further analyses show that the process by which typhoon disasters' effect on financial institutions is transmitted is not monolithic. Typhoon disasters first hit the real economy, then are transmitted to the financial system, and finally swing back to the real economy. Specifically, after being affected by a typhoon disaster, the production and operation of enterprises fall into “economic difficulties,” which are transmitted to the bank level, making banks' NPLR increase (i.e., an increase in passive risk-taking). This further affects banks' future credit decision-making, such as causing them to tighten the extent of credit and reduce their appetite for risk (i.e., a decrease in active risk-taking). This, in turn, feeds back to the enterprise level, increasing the cost of financing for enterprises and ultimately magnifying the impact of the typhoon disaster on overall economic and financial activities.
The possible innovations of this paper are as follows. First, the paper empirically tests the impact of typhoon disasters on the credit risk of China's commercial banks by using indicators of typhoons' destructive force, and verifies the hypothetical mechanism by which typhoon disasters affect bank credit risk. This enriches research on climate finance and the empirical literature on the association between bank risk and other climatic disasters in China. Second, this paper analyzes the “feedback loop” characteristic of typhoon disasters, i.e., the series of feedback behaviors that are brought about by typhoon disasters and impact bank risk, which provides theoretical support for the financial industry to assess climate risk and a reference for the design of subsequent related research. Finally, this paper calculates the asset loss caused by typhoon disasters to enterprises through a wind field model, which can provide a scientific basis for financial institutions to make future lending decisions and help avoid the influence of pro-cyclical thinking.
This study provides new empirical evidence for banks' climate risk governance. The policy implication of this paper is clear: it is important to pay attention to the banking risk and financial stability issues arising from climate change such as typhoon disasters. Considering the possibility of typhoon attacks in the future, on the one hand, banks and other financial institutions should make good preparations for short-term typhoon-induced credit losses, improve ex-ante collateral prevention preparations, control credit quality in a timely manner, and also strengthen co-operation with insurance companies so as to make preparations for double-insurance of collaterals both ex-ante and ex-post. On the other hand, banks and other financial institutions should incorporate climate risk into risk management and improve the identification and quantification of climate risk, regularly implement climate and environmental risk stress tests, and calculate the probability of default and the default loss rate of lending enterprises under different scenarios, so as to ensure that the financial sector will fully consider the climate and environmental risks.
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Received: 27 June 2023
Published: 17 July 2024
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