Decomposing Climate Policy Uncertainty and Systemic Banking Risk in the United States: Implications for Sustainable Finance

Climate policy uncertainty is usually measured as a single index, which cannot tell supervisors whether risk to banks comes from Congress, federal agencies, or international commitments. This study separates these channels. Because banks provide much of the credit needed for the low-carbon transition, knowing where this risk comes from matters for sustainable finance as well as for financial stability. We build legislative and regulatory indices that count formal attempts to block, delay, or reverse existing U.S. climate policy, alongside an international-commitment index and a market-based transition uncertainty measure. Using monthly data from January 2005 to December 2024, a quantile VAR with frequency decomposition, a time-varying model, and bias-corrected bootstrap inference, we trace spillovers to G-SIB, regional and broker-dealer equity risk, G-SIB CDS spreads, and ΔCoVaR. In normal months, climate policy uncertainty has little measurable effect on bank risk once broader financial conditions are controlled for. Spillovers emerge in the tails and build within a quarter. Regulatory reversal risk outweighs the international and market channels when bank risk rises fastest, but no more than contested legislation does. In the tails, the resolution of policy fights moves bank risk more than their outbreak, and legislative spillovers disappear when contested bills are replaced by the volume of climate legislation. Climate stress scenarios should therefore center on contestation episodes and tail states. Because a stable banking system is needed to fund the transition, the findings show that predictable and durable climate policy supports both financial stability and sustainable development.