Banks and Climate Risks

Abstract Banks sit at the center of climate risk dynamics, as virtually all firms and households exposed to climate risks interact with banks through credit, deposits, and other financial services. We develop a framework for how climate risks map onto banks' credit, market, liquidity, and operational risks, and how bank risk management choices in turn shape real economic and climate outcomes. We highlight banks' dual role as absorbers and transmitters of climate risks: prudent management can enhance resilience, while credit rationing or mispricing may amplify vulnerabilities and inequality. By synthesizing recent literature and regulatory approaches, we underscore that climate‐related financial risks are central to the banking sector and identify open questions for research and policy.