Climate-related risks and resilience of conventional banks: the role of sustainable development

Abstract

This paper examines the impact of climate risk on bank stability and investigates the moderating role of sustainable development. Using an unbalanced panel of 68 conventional banks from 10 Middle East and North Africa (MENA) countries over the period 2005–2022, the study applies a dynamic panel data approach estimated by the System Generalized Method of Moments (SGMM) to address potential endogeneity. The climate risk index (CRI) was rescaled so that higher values indicate higher climate risk. The empirical results indicate that climate risk has a negative and statistically significant impact on bank stability measured by Z-score (ROA). In contrast, sustainable development is found to have a positive and significant effect on bank stability. Furthermore, the interaction between climate risk and sustainable development (CRI*SDI) is positive and significant, suggesting that higher levels of sustainable development mitigate the adverse impact of climate risk on banks. These results are robust across three alternative measures of bank stability, namely portfolio risk and leverage risk.