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The impact of climate risk on bank profitability through liquidity creation channel: empirical evidence from G7 countries

Author

Listed:
  • Seungho Lee

    (University of Aberdeen)

  • Md Zahangir Alam

    (University of Aberdeen)

Abstract

This study investigates the impact of climate change-induced risk on bank profitability in the G7 countries from 2001 to 2022. Using dynamic panel GMM estimation to analyse banking industry data with climate risk factors, we find that climate risk has a negative effect on bank profitability. The study also demonstrates that bank liquidity creation plays a key role in transmitting the adverse impact of climate risk on bank profitability. Additionally, the results of the study are robust and withstand different measures of bank liquidity creation. Furthermore, our empirical findings indicate that the influence of climate risk factors is consistent, even for banks primarily focussed on the insurance business. These findings suggest that policymakers may need to implement climate risk management policies to mitigate the detrimental effects of climate change on the banking sector.

Suggested Citation

  • Seungho Lee & Md Zahangir Alam, 2024. "The impact of climate risk on bank profitability through liquidity creation channel: empirical evidence from G7 countries," Journal of Asset Management, Palgrave Macmillan, vol. 25(7), pages 726-739, December.
    • Handle: RePEc:pal:assmgt:v:25:y:2024:i:7:d:10.1057_s41260-024-00384-x
    DOI: 10.1057/s41260-024-00384-x
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    More about this item

    Keywords

    Bank profitability; Climate risk; Liquidity creation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • 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

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