Climate Change and Bank Performance in Africa: The Role of Monetary Policy

Abstract

This study examines the impact of climate change on bank profitability and bank stability in Africa and the moderating role monetary policies play in this relationship. Employing the Panel Corrected Standard Errors (PCSE) to analyze a panel dataset of 40 African countries over eleven (11) years— 2008 to 2018—obtained from the World Development Indicators (WDI) and the Climate Change Indicators Dashboard from the International Monetary Fund (IMF), this study finds that annual surface temperature change (ASTC) has an adverse significant effect on bank profitability and stability. Additionally, greenhouse gases also have a substantially negative impact on bank profitability but boost bank stability. However, the study finds that monetary policies can moderate climate change’s impact on bank profitability and stability depending on the type of indicator. This study contributes to existing literature by providing insight on the impact climate change can have on the banking industry in Africa, and if central banks using monetary policy tools can curb this impact. In terms of policy recommendation, central banks should mandate banks to carry out climate stress tests and scenario analyses. Additionally, central banks should collaborate with relevant authorities and standard-setting bodies to develop and promote climate-related standards and more relevant monetary policy tools.