The impacts of climate change on bank performance: What’s the mediating role of natural disasters?

This research estimates the effect of climate change on bank performance by considering the mediating role of natural disasters via unbalanced panel data from 2005 to 2018 in 127 countries. Moreover, this paper uses forest land, carbon dioxide emissions, and temperature change to measure climate change, takes economic loss and the number of deaths as costs of natural disasters, and utilizes the non-performing loan ratio and the ratio of bank capital to assets as bank performance. The following conclusions are reached according to our empirical evidence. First, forest land has a strong negative effect on the non-performing loan ratio. Second, forest land decreases the economic losses and deaths due to natural disasters, and natural disasters also decrease banks’ non-performing loan ratio. We also find that forest land increases the ratio of bank capital to assets through decreasing natural disasters. Third, there is a significant mediating effect of climate change on bank performance via natural disasters in high-income countries, but not in low-income countries. Finally, the decline of forest land and the rise of carbon dioxide emissions both have significantly positive effects on man-made disasters, which increase banks’ non-performing loan ratio and decrease the ratio of bank capital to assets. One policy implication is that improving climate change, preventing natural disasters, and promoting financial institutions can help decrease the economic losses of natural disasters and banks.