Climate Shocks and U.S. Bank Stability
We study how ENSO-driven climate variability—especially La Niña—transmits physical climate risk to U.S. banks’ stability in a large quarterly panel.
Key contributions
Uses ENSO as a quasi-natural experiment to identify systemic climate variability effects on banking stability.
Builds a 30-year quarterly panel (1994–2023) combining bank balance sheets, branch geolocation, and localized exposure measures.
Finds that strong La Niña shocks reduce distance-to-default by ~20%, peaking 7–11 quarters after the shock, with heterogeneous effects by exposure and portfolio composition.
Abstract
This paper investigates the effects of systemic climate variability on U.S. banking stability using the El Niño-Southern Oscillation (ENSO) as a quasi-natural experiment. In contrast to studies focusing on rare, localized natural disasters, we examine how persistent and spatially heterogeneous ENSO-induced climate anomalies-especially those associated with the often-overlooked La Niña phase-affect banks across the continental United States. ENSO is the most influential source of interannual climate variation on Earth and provides a compelling setting to study the transmission of exogenous physical risks to the financial sector. We construct a 30-year quarterly panel of over 800,000 bank-quarter observations (1994-2023), combining detailed financial data with geolocated branch networks and high-resolution teleconnection estimates of local temperature anomalies. Our empirical strategy combines three key elements: a regime-based climate shock identification grounded in recent climate science, a granular spatial matching of institutions to localized exposure, and a dynamic panel framework based on local projections. Our results show that strong La Niña shocks reduce the distance to default by roughly 20%, with effects peaking between 7 and 11 quarters after the shock. These disruptions operate primarily through rising credit risk, lower profitability, and weaker solvency-particularly in banks with large real estate exposure, broad but climate-sensitive geographic footprints, and sizable balance sheets. These findings underscore the need for prudential regulation to incorporate granular, forward-looking metrics of physical climate risk, especially as ongoing climate change is expected to increase the frequency and intensity of ENSO events.
Keywords: Banks, Climate, Stability, ENSO
JEL Classification: G21, Q54, G01, C23