Climate change will wreck the economy through bank lending behavior long before it causes any actual financial losses on bank balance sheets.
April 25, 2026
Original Paper
Banking-Sector Climate Transition Risk and Corporate Climate Exposure
SSRN · 6620878
The Takeaway
Banks act as a transmission channel for climate risk by tightening credit for companies in vulnerable regions. This credit squeeze happens as a preventative measure well before a disaster actually occurs. While the banks themselves appear safe and stable, the companies that rely on them for loans face a sudden and painful shortage of capital. This finding challenges the belief that the financial system will be the last thing to feel the impact of a warming planet. In reality, the financial system will be the first to spread the shock to everyone else. The credit channel means the economic pain of climate change starts as soon as the banks get nervous.
From the abstract
Banking-sector climate transition risk propagates to nonfinancial firms through the credit channel, reaching the broader economy before financial losses appear on bank balance sheets. In a panel of over 3,500 U.S. firms from 2001 to 2024, a one-standard-deviation increase in the banking sector's aggregate climate-related capital shortfall is associated with a 14.8% increase in overall firm-level climate discussion in earnings calls and a 60.0% increase in discussion of climate regulation and car