Climate-related communication of central banks and bank risk

This study examines the influence of green rhetoric from central banks on banking institutions. Using a sample of 437 publicly listed banks from 43 countries between 2000 and 2019, I find a positive correlation between an increased proportion of climate-related discourse in central bank speeches and a reduction in both systematic and systemic risk for banks. This may be attributed to improved transparent communication by central banks, which reduces individual and systemic risk for banks. This, in turn, supports the accountability and independence of central banks, which are negatively correlated with bank risk-taking behavior. In a similar vein, central banks that are most vocal about climate issues are also leading the way in adopting climate-related policies that facilitate the transition to net zero, which are positively associated with financial stability. The findings of this study have significant policy implications in the context of central bank's growing involvement in climate-related issues and their consequent shaping of market participants' perceptions.