Climate change on bank balance sheets.

Banks and regulators increasingly recognize climate change as a source of considerable risk. Rising temperatures and increasing natural disasters threaten people’s homes, livelihoods, and lives. Combatting these risks by limiting society’s excessive emission of greenhouse gases constitutes a major risk in and of itself that jeopardizes many firms’ financial health. While the financial system plays a central role in this problem, research on banks’ exposure to and influence on climate change is still in its infancy. In this project, I study the relationship between bank credit and two aspects of climate risk: emissions and physical risks (floods). In a first work package, I analyse how banks’ decision-making when extending loans is influenced by corporate borrowers’ emissions. Second, I investigate whether banks can influence borrowers’ emissions. By “pricing” emissions into loan conditions (e.g., interest rate), banks may be able to push polluting firms to reduce their emissions. While physical risks constitute a major threat in the longer term, little is known about their impact on banks. In a third work package, I address this knowledge gap by focusing my attention on floods. Leveraging a unique dataset on residential mortgages, I analyse how flood risk influences banks’ lending decisions and how floods impact banks’ mortgage loans portfolio. These results are important for banks and supervisors as they inform optimal risk management practices.