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Climate accelerator: Physical risk intensifies spillovers between banking and real economy sectors

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  • Fan, Wenna
  • Wang, Feng
  • Zhang, Hao

Abstract

This research examines the risk spillovers between China’s listed banking sector and 18 real industries from 2005 to 2023 and their impacts by climate-related physical risks using a combination of mathematical economics, TVP-VAR-DY, and QR models. The results reveal significant bidirectional risk spillovers, with the banking sector receiving stronger risk inflows from real industries than its outward spillover intensity, yet exhibiting greater volatility in its spillover effects to real sectors. Climate-related physical risks reduce asset prices and capital stock in the real sectors, intensify banking credit contraction, and conversely propel risk transmission to the real economy. Physical risks exert an accelerator effect, amplify the bidirectional spillovers of physical risks between banking and real economy sectors, and exhibit asymmetric heterogeneous impacts across different spillover directions and levels. Overall, the positive impact of physical risks on low-inflow banking markets is significantly stronger than on high-inflow markets, while the reinforcing effect of physical risks on the banking sector with high-outflow levels is more pronounced. These findings provide policy recommendations—focusing on network connectivity and differentiated mechanisms—to help regulators and financial institutions mitigate these climate-amplified spillovers.

Suggested Citation

  • Fan, Wenna & Wang, Feng & Zhang, Hao, 2026. "Climate accelerator: Physical risk intensifies spillovers between banking and real economy sectors," Finance Research Letters, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:finlet:v:100:y:2026:i:c:s1544612326004745
    DOI: 10.1016/j.frl.2026.109945
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