The diverging impact of climate policy intensity and climate adaptation readiness on U.S. bank performance and risk

Using data from the largest U.S. Banks between 2005 and 2021, we examine how climate policy influence U.S. banks. In particular, the study explores the differential or reverse effects of Environmental Policy Stringency (EPS), Policy Uncertainty (CPU) and Climate Adaptation Readiness (ND Gain Score) on risk and performance of U.S. banks. We examine the hypotheses that the joint effects of Climate Policy Uncertainty and Stringency would increase bank risks whilst climate adaptation initiatives would reduce bank risk and boost banking performance. We further highlight the evolving nature of climate policy landscape and its impact to banking risk and performance by adding tests to explore time varying effects (post Paris agreement). Our research aims to shed more light on the environmental policies-risk-performance nexus, a topic that is gaining traction among stakeholders, regulators and investors. Our findings contribute to understanding the economic impact of climate policies in banking and showcase the crucial role of short-term costs and long-term benefits of adaptation for helping regulators and policymakers in evaluating climate-based turbulence and financial sector regulation.