The impact of climate physical risks on risk-taking of Chinese small and medium-sized banks: Transmission mechanism and heterogeneity

The frequent occurrence of extreme weather events has intensified climate physical risk, posing a severe challenge to the stability of the financial system. Using unbalanced panel data of Chinese small and medium-sized banks from 2010 to 2022 as the sample, this paper empirically examines the impact of climate physical risk on banks' risk-taking and its transmission mechanism. The findings are as follows: (1) Climate physical risk significantly increases the non-performing loan ratio of small and medium-sized banks and exacerbates their risk-taking. This conclusion remains valid after robustness tests such as replacing explanatory variables, high-dimensional fixed effects, and sample winsorization. (2) Climate physical risk affects the quality of banks' credit assets and corporate default probability by reducing enterprises' operational capacity and cash reserves, thereby increasing banks' risk-taking levels. (3) Enhancing the intensity of fiscal environmental expenditure and improving the level of insurance coverage help mitigate the impact of climate physical risk on banks' risk-taking. (4) Rural commercial banks, banks with small asset sizes, non-state-controlled banks, banks in eastern regions, and commercial banks with low capitalization are more sensitive to climate physical shocks. This study provides empirical support and reference for improving the climate risk prevention and control system of small and medium-sized banks and promoting green financial transformation.