The Impact of Media-Based Transition and Physical Climate Risks on Banks’ Credit Risk: Evidence from a Dynamic Panel Threshold Model

This paper examines the threshold impact of media-based attention to transition and physical climate risks on banks’ credit risk among the 230 largest US commercial banks from 2011 to 2022. Using a dynamic panel threshold model, our analysis reveals a non-linear relationship between media-based climate risk and banks’ credit risk. The empirical results indicate the existence of a significant threshold dividing the data into lower and upper regimes for both climate transition risks and physical climate risks. More specifically, the estimated threshold levels are 0.500 for the transition risk index and 0.571 for the physical climate risk index. Below these critical thresholds, banks appear resilient to increased media attention to climate risks; however, once these thresholds are exceeded, growing concern about climate risks significantly increases banks’ vulnerability to credit risk. These findings highlight the critical implications of physical and transition risks for financial stability. Our results are robust to a range of alternative measures and model specifications, providing valuable insights for bank managers, regulators, and policymakers, while emphasizing the need to integrate media-based climate risk considerations into credit risk assessments and policy frameworks to strengthen the banking sector’s resilience.