The impacts of climate risk on the lending activities of Vietnamese commercial banks

Abstract

This study examines the impact of climate risks, including both physical and transition risks, on the lending activities of commercial banks in Viet Nam. Lending activities are measured through the growth rate of outstanding credit, with a dataset of 345 observations from 23 commercial banks in the period 2010- 2024, combined with the Global Climate Risk Index (Climate Risk Index- CRI) published by Germanwatch. Using the GMM regression model, the empirical results show that climate risks have a significant negative impact on bank lending activities: as the frequency and severity of extreme climate events increase, banks tend to tighten their policies to mitigate hidden risks. On that basis, the study proposes a number of policy functions to minimize the adverse impacts of climate risks on banking operations, including: (i) strengthening the climate factor framework in the credit risk management framework; (ii) promoting the development of green credit products and green transition support mechanisms; and (iii) improving the capacity to assess, monitor and forecast climate risks at the bank and system levels.