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Climate Risk and Bank Capital Structure

Author

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  • Yassine Bakkar

    (Queen’s University Belfast)

Abstract

We study the role of climate risk exposure in the dynamic behavior of banks’ regulatory capital adjustment using a large European sample from 39 countries during the 2006–2021 period. We find that banks facing high exposure to climate risk opt for a higher target (regulatory) capital adequacy ratio and make faster adjustments to their optimal capital structure, especially if they are more exposed to carbon pollution. Such banks boost their adjustment during the post-Paris Agreement period. These banks move to their target capital adequacy ratio mainly by adjusting their risk-weighted assets or by reallocating them more quickly than their peers, without necessarily altering assets, particularly lending. This paper lends support to the importance of taking climate change-related risks into prudential supervision to protect the financial system’s resilience and contributes to the debate on climate-related capital requirements.

Suggested Citation

  • Yassine Bakkar, 2023. "Climate Risk and Bank Capital Structure," Bank of Lithuania Discussion Paper Series 32, Bank of Lithuania.
    • Handle: RePEc:lie:dpaper:32
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    More about this item

    Keywords

    Dynamic capital structure; Speed of adjustment; Climate change; Paris Agreement; Balance sheet composition;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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