How does climate risk affect bank loan supply? Empirical evidence from China

Abstract

The impact of the climate change on the real economy and financial system has aroused great concern from the Chinese government and financial regulator. The objective of this paper is to examine the impact of climate risk on bank loan supply by using the sample of 403 commercial banks from China over the period 2008–2018 and fixed effects panel regression models. Our empirical studies obtain four findings. First, climate risk has a significant negative impact on the bank loan supply. Second, this adverse effect of climate risk can be mitigated by government’s climate protection performance and monetary expansion. Third, climate risk can inhibit loan supply through reducing banks’ risk appetites and decreasing their deposits. Finally, the negative influence of climate risk on loan supply is more pronounced for banks with less deposits and banks located in coastal areas. One policy implication is that commercial banks should adjust the structure of credit business and innovate loan products.