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The interaction of climate risk and bank liquidity: An emerging market perspective for transitions to low carbon energy

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  • Lang, Qiaoqi
  • Ma, Feng
  • Mirza, Nawazish
  • Umar, Muhammad

Abstract

Climate change leads to many financial risks, including exerting pressure on banking liquidity. The issue is plausibly more severe for emerging markets that suffer from financial frictions. Therefore, an assessment of the liquidity profile of banks in emerging markets is necessary to understand the devastating impact of climate risk to devise optimal financial strategies to support low-carbon transitions. Using a comprehensive sample of banks from twenty-three emerging markets and assessing data for over a decade, we report that climate risk is negatively associated with liquidity. This means that banks that are domiciled in countries with a higher level of climate risk are likely to experience more liquidity pressures. The finding remained robust for various definitions of liquidity and after controlling for a series of exogenous variables. We argue that such pressures emanate from both physical and transitional risks and therefore it is in the interest of financial intermediaries to devise sustainable financial strategies to support sustainable development goals and limit ecological degradation.

Suggested Citation

  • Lang, Qiaoqi & Ma, Feng & Mirza, Nawazish & Umar, Muhammad, 2023. "The interaction of climate risk and bank liquidity: An emerging market perspective for transitions to low carbon energy," Technological Forecasting and Social Change, Elsevier, vol. 191(C).
    • Handle: RePEc:eee:tefoso:v:191:y:2023:i:c:s0040162523001658
    DOI: 10.1016/j.techfore.2023.122480
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    7. Yang, Xin & Wei, Luohan & Deng, Rantian & Cao, Jie & Huang, Chuangxia, 2023. "Can climate-related risks increase audit fees?–Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    8. Nan, Qiuying & Sun, Mengchan & Nie, Jiajia & Yang, Rui & Wan, Lijuan, 2023. "The efficacy of a forward market for the agricultural sector in mitigating climate risk: A potential alternative to agricultural subsidies?," Finance Research Letters, Elsevier, vol. 55(PB).
    9. Jiang, Haiyun & Xu, Shulin & Cui, Jingwen & Subhani, Ghulam, 2023. "The impact of bank capital, liquidity and funding liquidity on sustainable bank lending: Evidence from MENA region," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 713-726.
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    More about this item

    Keywords

    Climate change; Emerging markets; Liquidity risk; Banking;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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