Climate vulnerability and credit risk: challenges and approaches for the banking sector

<ns3:p>This study examines the integration of climate risk into credit risk assessment within the banking sector. We review the types of climate-related risks and the channels through which they may affectfinancial institutions, including physical risks from extreme weather events, transitional risks, and regulatory pressures. The paper highlights key challenges in incorporating climate considerations into credit risk models, notably data limitations at both national and firm levels, as well as the limited historical data on climate-related financial impacts. The aim of this study is to examine the impact of climate risk on the credit risk of commercial banks. The empirical analysis is based on a sample of 438 commercial banks from 54 countries worldwide, spanning the period from 2016 to 2022. Our findings reveal complex and sometimes counterintuitive relationships, underscoring that integrating climate risk into credit assessments is a methodologically demanding process that requires careful interpretation of both data and indicators.</ns3:p>