Does climate policy uncertainty exacerbate systemic risk contagion among banks? Evidence from China

This study examines whether rising climate policy uncertainty amplifies systemic financial risk contagion, a concern that is becoming increasingly relevant in the context of climate change. Using a sample of Chinese listed banks, we quantify risk spillovers across quantiles and assess the role of Climate Policy Uncertainty (CPU) through panel regression analysis. Our results show that systemic risk contagion intensifies markedly during extreme market downturns compared to normal periods. Furthermore, we find that CPU significantly exacerbates such contagion, though its impact varies by bank type and market state. Specifically, state-owned banks exhibit substantially amplified risk transmission under CPU, with outward spillovers more affected than inward spillovers, and a stronger influence during normal conditions versus downturns. Similarly, joint-stock banks experience increased contagion in both normal and stressed markets, especially in outward spillovers. In contrast, city commercial banks are sensitive only to inward spillovers under normal conditions, with no significant CPU effect otherwise. These findings offer important implications for regulators tasked with monitoring systemic risk propagation and designing policies to mitigate climate-related financial instability. The heterogeneous effects across bank types further underscore the need for differentiated risk management strategies within China’s banking system.