The Impact of Climate Policy and Natural Disasters on Banks’ Credit Risk: Evidence from the Dynamic Panel Threshold Model

This paper examines the threshold impact of low and high media attention on climate risks and US climate policy, on banks' credit risk among the 230 largest commercial banks in the United States between 2011 and 2022. Using a dynamic threshold regression model, our analysis reveals a non-linear relationship between climate risk and banks’ credit risk. This result suggests that banks may be resilient to climate risk up to a point but become vulnerable once that threshold is exceeded. This finding highlights the importance of physical and transition risks, as well as their implications for financial stability. Our results are robust to a range of alternative measures and model specifications, providing valuable insights for bank managers, regulators, and policymakers. It highlights the need to integrate climate risk considerations into credit risk assessments and policy frameworks to strengthen the banking sector's resilience.