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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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    References listed on IDEAS

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    1. Cortés, Kristle Romero & Strahan, Philip E., 2017. "Tracing out capital flows: How financially integrated banks respond to natural disasters," Journal of Financial Economics, Elsevier, vol. 125(1), pages 182-199.
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    4. Brei, Michael & Mohan, Preeya & Strobl, Eric, 2019. "The impact of natural disasters on the banking sector: Evidence from hurricane strikes in the Caribbean," The Quarterly Review of Economics and Finance, Elsevier, vol. 72(C), pages 232-239.
    5. Loayza, Norman V. & Olaberría, Eduardo & Rigolini, Jamele & Christiaensen, Luc, 2012. "Natural Disasters and Growth: Going Beyond the Averages," World Development, Elsevier, vol. 40(7), pages 1317-1336.
    6. Calice,Pietro & Miguel Liriano,Faruk, 2021. "Climate-Related and Environmental Risks for the Banking Sector in Latin America and the Caribbean : A Preliminary Assessment," Policy Research Working Paper Series 9694, The World Bank.
    7. Oliver Rehbein & Steven Ongena, 2020. "Flooded Through the Back Door: The Role of Capital in Local Shock Spillovers," CRC TR 224 Discussion Paper Series crctr224_2020_043v2, University of Bonn and University of Mannheim, Germany.
    8. Ulrich Schüwer & Claudia Lambert & Felix Noth, 2019. "How Do Banks React to Catastrophic Events? Evidence from Hurricane Katrina," Review of Finance, European Finance Association, vol. 23(1), pages 75-116.
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    Cited by:

    1. Vinzenz Peters, 2025. "How Banks are Impacted by and Mediate the Economic Consequences of Natural Disasters and Climate Shocks: A Review," De Economist, Springer, vol. 173(1), pages 47-85, March.

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