CLIMATE RISK AND BANK STABILITY: EVIDENCE FROM EMERGING COUNTRIES

Abstract

This study examines the impact of climate risks on banking stability
across international emerging countries using a dataset of 1,857 bank-year
observations from 18 countries. The Global Climate Risk Index (CRI)
developed by Germanwatch is used to quantify economic damage and
fatalities from extreme weather events while bank Z-score is employed to
measure bank stability. Using fixed-effect and feasible generalized least
squared (FGLS) regressions, we find that increased climate risk generally
diminishes bank stability. We also find that GDP growth and inflation
positively influence stability. Conversely, factors like bank size have a
negative impact on stability. These findings suggest a proactive approach
from policymakers and financial institutions to mitigate the detrimental
impact of climate risks on banking stability.