Does climate change affect bank lending behavior?

We examine how banks adjust credit supply in areas with higher exposure to climate risks by utilizing the province-level air pollution and loan growth data of a large emerging market, Turkey, following the Paris Agreement in 2015. Our results show that banks limit their credit extension to more polluted provinces in the post-agreement interval, implying that banks consider climate change-related risks and adjust their credit provisioning accordingly. Our baseline findings are intact against a myriad of robustness checks. We also find that the shift in the climate risk-credit provisioning nexus is asymmetric depending on the levels of air pollution. •In the Turkish banking sector, banks adjust credit allocation to provinces with air pollution following the Paris Agreement.•This behavior is not only limited to private banks but is also initiated by state-owned banking entities.•The shift in the association between climate risks and loan growth is stronger for commercial loans.•The relationship between climate risks and loan growth is asymmetric contingent on the level of air pollution.