Banks’ environmental policies and banks’ financial stability

We study whether environmental engagement of banks mitigates the effects of natural disasters\r\nand climate-change related events on financial stability. Employing an extensive global dataset\r\nwith quarterly data (2003–2019; 5,317 observations), our analysis reveals that environmental\r\ninnovation financing, product responsibility, and resource reduction policies are able to curtail\r\nthe repercussions on stability of economic costs due to environmental events. We also find that\r\nthe lending function of banks is a relevant mediating channel for this relationship. Since borrowers’\r\nvulnerability to climate issues may be reflected in non-performing loans, banks’ environmental\r\nengagement provides protection against future related credit losses. Moreover, by\r\ncapitalizing on global disasters as quasi-natural experiments, we provide empirical evidence\r\nconfirming that a stronger environmental engagement of banks enhances their post-event\r\nfinancial resilience. Taken together, our results convey several key implications: i) bank executives\r\ncan improve financial stability by embracing environmental policies, ii) stronger regulatory\r\nactions towards environmental sensitivity in the banking sector is supported, and iii) environmentally\r\nengaged banking systems can mitigate the economic costs associated with climate\r\nchange and environmental disasters.