Does climate change matter for bank profitability? Evidence from China

Abstract

Using panel data from 87 China’s banks from 2011 to 2022, this research investigates whether and how climate change affects bank profitability. It is discovered that the improvement of bank profitability is severely hampered by climate change. The main ways that climate change affects bank profitability are by causing financial losses to bank creditors, changing the likelihood of defaults and the quality of bank credit assets. Energy conservation and carbon reduction, the implementation of green financial policies, and ensuring that banks have enough capital are all factors that can help mitigate the negative effects of climate change on bank profitability. In addition, climate change has a greater negative effect on the profitability of small-sized banks, regional banks, and banks with lower levels of liquidity. In conclusion, this study offers forward-looking suggestions for banks to reduce risks from climate change, which is critical for encouraging low-carbon and green development and averting systemic financial risks. It also offers theoretical references for Chinese banks to develop customized policies and strategies to address these risks.