Extreme weather and the financial sustainability of rural commercial banks: evidence from China

Rural commercial banks play a key role in providing financial services in rural areas of China. However, the adverse consequences of extreme weather events pose significant challenges to the financial sustainability of these banks. Using data from 71 rural commercial banks in China between 2007 and 2022, this paper empirically analyzes the impact of extreme climate events on the financial sustainability of rural commercial banks. The study finds that extreme weather significantly reduces the profitability and technical efficiency of rural commercial banks. The impact of extreme precipitation is more pronounced compared to that of extreme high and low temperatures. Moreover, rural commercial banks located in major grain-producing regions, with higher levels of financial competition and digitalization, are more significantly affected by extreme precipitation. Extreme precipitation primarily affects the asset quality of individuals, households, and enterprises by reducing deposit volumes and loan availability, thereby undermining the financial sustainability of rural commercial banks. The study suggests that a collaborative mechanism led by the government and involving multiple stakeholders should be established. This can be achieved by optimizing the internal risk management of rural commercial banks, strengthening the mechanisms for climate risk prevention and mitigation, and continuously improving financial services in rural areas.