Abstract

The objective of this paper is to investigate the impact of climate risk on the stability of regional commercial banks in China. We examine both physical and transitional risks and their potential to adversely affect loan quality. The sample for this study spans from 2010 to 2019 and includes 591 regional commercial banks in China. Our analysis reveals a positive association between higher levels of climate risk and higher levels of non-performing loans. This relationship holds true even after conducting various robustness tests. Additionally, we find that banks react to transitional policies by modifying their portfolios, as evidenced by a quasi-natural experiment of green finance reform. These findings contribute to the expanding literature on climate finance and underscore the need for regulators to consider climate risk as a critical factor in maintaining financial stability.

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