Climate Risk and Commercial Bank Portfolio Risk Density: Evidence from China

Climate risk has become an emerging source of financial instability as global climate governance tightens and the low-carbon transition accelerates. Using a balanced panel of 33 Chinese A-share listed commercial banks from 2014 to 2023, this study examines the association between a composite climate-risk indicator and the risk-weighted assets (RWA) ratio. The comprehensive climate risk index (CCRI) combines branch-weighted physical risk exposure with the length-adjusted intensity of transition risk information in banks’ annual reports. The results show that a higher CCRI is associated with a higher RWA ratio, indicating higher regulatory risk density in banks’ asset portfolios. The finding is robust to alternative dependent variables, the exclusion of key policy years, alternative CCRI weighting schemes, and a lagged CCRI specification. Further analyses show that the loan-to-asset ratio (LTA) is positively associated with the RWA ratio, while liquidity weakens the positive CCRI–RWA association and heterogeneity emerges across coastal exposure, provision coverage, and long-term physical climate risk exposure. The findings inform bank asset allocation, liquidity management, and climate-related prudential supervision.