Purpose This study aims to investigate how country-level institutional and regulatory factors influence the relationship between climate risk and the financial stability of banks. By focusing on 160 commercial banks across 12 countries in the Middle East and North Africa (MENA) and South/Southeast Asia regions from 1999 to 2021, this study addresses a critical gap in the literature concerning the differential impacts of climate risk on banking systems across these regions. Design/methodology/approach This study uses a random-effects generalized least squares (RE-GLS) regression model as a main specification and validates the results with robustness checks, including an alternative climate risk measure and a system-GMM approach to address endogeneity concerns. This study further explores heterogeneity across bank size, capital adequacy and institutional quality. Findings The results confirm that climate risk significantly undermines bank stability. This effect is more pronounced in countries with weak institutional quality, particularly where the rule of law is limited and government effectiveness is poor, especially within MENA countries. Strong regulatory frameworks, including high official supervisory power and effective private monitoring, enhance resilience to climate shocks. However, excessive regulatory constraints can restrict banks’ adaptive capacity. At the bank level, larger banks are generally more resilient to climate-related risks, while a high capital adequacy ratio does not significantly mitigate these negative effects. Originality/value This study provides new evidence from emerging economies on how institutional quality and regulation shape banks’ resilience to climate risk. It highlights regional disparities in climate vulnerability and offers guidance for policymakers and regulators on strengthening financial stability.
Houssem Ben-Ammar (Wed,) studied this question.