Climate risk and bank liquidity creation in MENA region: a dual threshold–quantile approach

Purpose This study aims to examine the complex, nonlinear relationship between climate risk and bank liquidity creation (LC) in the Middle East and North Africa (MENA) region, a climate-vulnerable area where this channel remains largely unexplored. Design/methodology/approach The authors apply a novel dual threshold–quantile method, complemented by a quantile-on-quantile approach, to a panel data set of 126 banks in 19 MENA countries over 2006–2022. This methodology allows us to identify critical risk thresholds and capture heterogeneous effects across the entire distribution of liquidity creation. Findings The results reveal a threshold-dependent relationship: climate risk exerts a positive and significant influence on bank LC, but only after surpassing a critical level of risk exposure. Furthermore, this positive effect is heterogeneous and is most pronounced for banks with moderate, rather than low or high, levels of preexisting liquidity creation. Research limitations/implications The findings highlight that policymakers and financial regulators must account for nonlinearities and distributional heterogeneity. Climate risk should be integrated into financial stability frameworks not as a linear threat, but as a potential trigger for complex behavioral shifts that can expand liquidity under specific high-risk conditions. Originality/value This paper provides the first empirical evidence of a nonlinear climate risk−LC nexus in the MENA region. By moving beyond linear models and a narrow credit focus, the authors demonstrate that banks can paradoxically expand systemic liquidity in high-climate-risk regimes, driven by precautionary savings and flight-to-quality behavior.