Climate Change and Bank Stability: An Empirical Evidence from the Indian Banks

Globally, during the last two decades, the frequency and intensity of climate-induced natural disasters have increased significantly, including in India. The climate-related financial risk does have a substantial impact on the banking system, both directly and indirectly through the transmission channel. In this respect, the purpose of the present study is to investigate the impact of climate-induced natural catastrophes on the stability of the Indian banking sector by using panel data from the year 2002 to 2019. We find that a higher number of natural disasters, greater financial losses linked with natural calamities, and rising temperature levels are strongly and negatively associated with bank stability. Improving climate change adaptation and adopting prudential regulations for climate risk may help to contain economic and financial losses to the banking system by controlling frequent and severe natural disasters.