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Banking Sector Risk in the Aftermath of Climate Change and Environmental-RelatedNatural Disasters

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  • Nie,Ou
  • Regelink,Martijn Gert Jan
  • Wang,Dieter

Abstract

Climate change and environmental risks are increasingly recognized as a concern for financialauthorities, yet empirical evidence of the damage for bank balance sheets is relatively scant. This paper providespreliminary estimates of the aggregate impact of physical risks from climate and environmental-related naturaldisasters on bank balance sheets across 184 countries over nearly 40 years. Using the local projection method, theanalysis finds that severe disaster episodes lead to an increase in the level of systemwide non-performing loans,which is persistent over time. The paper complements the cross-country results with a country-specific example, whichfinds that typhoon damages lead to a significant increase in non-performing loans in the Philippines between 2011 and2018. The results suggest a role for financial policy and supervision to monitor, assess, and mitigate climate andenvironmental related physical risks to the banking sector.

Suggested Citation

  • Nie,Ou & Regelink,Martijn Gert Jan & Wang,Dieter, 2023. "Banking Sector Risk in the Aftermath of Climate Change and Environmental-RelatedNatural Disasters," Policy Research Working Paper Series 10326, The World Bank.
    • Handle: RePEc:wbk:wbrwps:10326
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