The banking instability and climate change: Evidence from China

Abstract

We show novel insights on the impact of climate change on banking stability utilizing network analysis techniques from the perspective of low-carbon transition. The framework depicts the risk dependence between banking sector and energy sectors based on the stock volatility information. Employing a Chinese dataset during 2009–2019, we show that low-carbon transition drives an increasing dependence of banking sector's risk on the new energy sector, while it depends less on the traditional energy sector with a turning point in 2012. On average, banking sector exhibits a more pronounced risk dependence on the new energy sector than the traditional energy sector. This study provides new evidence on the impact of climate policy on banking stability, which has policy implications for macro-prudential regulations.