Does climate change affect bank lending behavior?

Abstract

We examine how banks adjust credit supply in areas with higher exposure to climate risks by utilizing the province-level air pollution and loan growth data of a large emerging market, Turkey, following the Paris Agreement in 2015. Our results show that banks limit their credit extension to more polluted provinces in the post-agreement interval, implying that banks consider climate change-related risks and adjust their credit provisioning accordingly. Our baseline findings are intact against a myriad of robustness checks. We also find that the shift in the climate risk-credit provisioning nexus is asymmetric depending on the levels of air pollution. • In the Turkish banking sector, banks adjust credit allocation to provinces with air pollution following the Paris Agreement. • This behavior is not only limited to private banks but is also initiated by state-owned banking entities. • The shift in the association between climate risks and loan growth is stronger for commercial loans. • The relationship between climate risks and loan growth is asymmetric contingent on the level of air pollution.