How does climate risk affect bank efficiency?

Xianghao Zheng

Co-Presenters: Individual Presentation

College: College of Business and Public Management

Major: Finance

Faculty Research Mentor: Ahmed Alam

Abstract:

Given climate disasters' increasing frequency and severity, understanding how climate risk influences bank efficiency is crucial for financial institutions and policymakers. Using a sample of US banks over the years 2011-2021, this study seeks to examine the impact of climate risk on banks' income-to-cost efficiency. Fixed effects panel regressions are employed as the primary estimation methodology. Empirical results reveal that high climate risk is associated with substantial reductions in bank efficiency, an effect that appears to be robust across different estimation models. Both commercial and non-commercial banks suffer from adverse climate changes. Heterogeneity tests indicate that the reduction in efficiency is irrespective of a bank's size, liquidity, capital adequacy, and profitability, certifying the obviousness of the effect of climate risk. Contributing to the burgeoning literature on climate change and bank performance, our study provides implications for policymakers, bankers, and various stakeholders concerned about the financial well-being of banking institutions in an era of interminable climate challenges.