How does climate risk affect bank performance and systemic risk—evidence from Chinese commercial banks

The carbon trading market established to address climate challenges achieves significant emission reductions but brings about new challenges for banks. This article estimates the bank climate-driven losses and examines the impact of climate-driven losses on bank performance and systemic risk. The findings imply that large state-owned commercial banks suffer the highest climate risk and bear the greatest losses. City commercial banks are more flexible in adapting to market signals. They have lower climate-driven losses than Joint-stock banks. Rural commercial banks are mainly oriented to rural areas, which makes them have the lowest climate-driven losses. Climate-driven losses reduce banks’ performance and amplify the systemic risk of commercial banks. Investor sentiment and asset price volatility have significant mediation effects. Climate policy uncertainty, the 30–60 target and capital adequacy can mitigate the negative impacts of climate-driven losses on commercial banks. The findings provide policy recommendations for banks and regulators to address climate-driven losses. Large Commercial Banks and Joint Stock Banks suffer higher climate-driven losses than other types of banks due to their more extensive business networks with carbon-intensive industries.Climate-driven losses due to carbon trading prices reduce the performance and increase the systemic risk of commercial banks.Investor sentiment and asset price volatility mediate the impact of climate-driven losses on commercial banks.The climate policy uncertainty, the 30-60 goal and higher bank capital adequacy can mitigate the negative impact of climate-driven losses on the performance and systemic risk of commercial banks.