Impact of climate policy transition and physical risk on financial stability of US banks: a focus on top environmental-performing institutions

Konstantinos Michail Kapetanakis, Christos Floros and Emmanuel C. Mamatzakis

Journal of Economic Studies, 2025, vol. 53, issue 4, 861-876

Abstract: PurposeWe examine how climate policy transition risks affect both the instability and profitability of US banks. Specifically, the study examines how climate policy uncertainty (CPU) and energy prices as a proxy for environmental policy stringency and climate risk influence US banks. The analysis also focuses on high environmental rating banks, questioning whether their environmental performance enhances resilience to transition and physical risks.Design/methodology/approachWe utilize a dynamic panel dataset of over 4,400 observations, using quarterly data of the largest 100 US banks between 2011 and 2022. The two-step dynamic panel generalized methods of moments (GMM) estimation techniques are applied. The authors rerun the model for different dependent variables to test the validity of the estimations. A difference-in-differences (DiD) identification strategy with standard dynamic panel data methods, two-step system and difference GMM is complemented to address endogeneity and persistence. Robustness is established via jackknife corrections, placebo tests and nonlinear (quadratic) specifications.FindingsThe study reveals that energy prices, reflecting stricter environmental policies, mitigate the destabilizing effects of CPU and physical risks, supporting the hypothesis of an antagonistic relationship between the variables. The results from the base models and robustness tests consistently confirm the hypothesized link between climate policy stringency and banking stability, adding to the empirical literature on climate-stability interdependence.Research limitations/implicationsThe results need to be cast in the appropriate context, as energy prices, although serving as a proxy for environmental policies solely, do not fully reflect the stringency of environmental policies. Alternative proxies and placebo tests mitigate the aforementioned limitations.Practical implicationsThe study provides evidence that the corresponding environmental policies mitigate climate policy transition risks. This actuates regulators, policymakers and financial institutions seeking to strengthen stability in the face of climate risks.Originality/valueThe study provides new evidence into the nexus between transition risks, energy prices, physical risks and banks’ soundness. The current empirical studies for CPU and impact have brought mixed evidence. The energy price effects are not contextualized and integrated. The authors find consistent results, providing a broad and causal exploration.

Keywords: Bank; Climate policy uncertainty; Energy prices; Environmental policy stringency; GMM; Difference-in-differences; Stability; Profitability; ZSCORE; Environmental pillar score (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/jes/article/53/4/861/12684 ... nsition-and-physical (text/html)
https://www.emerald.com/jes/article-pdf/53/4/861/11573108/jes-01-2025-0036en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-01-2025-0036

DOI: 10.1108/JES-01-2025-0036

Access Statistics for this article

Journal of Economic Studies is currently edited by Prof Mohsen Bahmani-Oskooee

More articles in Journal of Economic Studies from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().