Climate risk stress testing for local commercial banks in China

Under the increasing frequency of extreme weather events and the accelerated transition toward China’s “dual-carbon” goals, local commercial banks are exposed to climate risks that are highly regional, strongly vulnerable, and characterized by complex transmission channels. Traditional stress-testing frameworks are insufficient to accurately capture the impact of climate shocks on the soundness of local commercial banks. This study develops a climate risk stress-testing system tailored to local commercial banks by integrating physical risk indicators such as extreme rainfall and extreme heat, and by constructing mild, moderate, and severe climate scenarios to quantify changes in bank soundness under different climate conditions. Based on sensitivity analysis, scenario analysis, and Monte Carlo simulation, the results show that physical climate shocks significantly weaken the financial soundness of local commercial banks and increase their non-performing loan ratios, with pronounced heterogeneity across regions and bank types. The findings provide an operational analytical framework for local commercial banks to build climate-sensitive risk-management systems, optimize credit structures, and strengthen scenario-based management.