Impact of climate risk on bank liquidity: Empirical evidence from emerging markets
Abstract
This study investigates the impact of climate risk on the liquidity profile of commercial banks in 23 emerging markets over the period 2007-2019. Our study finds evidence that heightened climate risk is positively correlated with bank liquidity risk. In other words, banks operating in countries with heightened climate vulnerabilities tend to experience greater liquidity pressures. This result is particularly pronounced in the context of emerging economies, which are among the regions most adversely affected by climate change—both because of their geographical exposure to extreme weather events, and because of structural limitations within their banking systems and macroeconomic. The finding therefore reinforces the need to integrate climate risk into bank liquidity management and supervisory practices, ensuring that banks develop the capacity to anticipate and absorb climate-induced shocks. This includes strengthening stress-testing methodologies, enhancing climate-related disclosures, and adopting prudential tools tailored to the specific vulnerabilities of emerging economies. By embedding climate considerations into core regulatory and risk-management architectures, policymakers can better safeguard banking system stability in the face of escalating environmental risks.