Impact of Biodiversity Risk on Bank Lending

AbstractThis study focuses on the consequences of the threat of biodiversity loss for bank lending in the US economy. Enlarged biodiversity risks are expected to reduce bank lending to biodiversity risk exposed industries in order to reduce the expected non-performing loans due to biodiversity losses. Accordingly, we examine the role of biodiversity risk in bank lending growth. Thus, the study fills an important gap in the literature and answers the call by Karolyi and Tobin-de la Puente (2023) who argue that the biodiversity-related financial risks have not been adequately framed. The study contributes to the literature on environmental risks in banking and augments the studies of Becker et al. (2025), Bruno and Lombini (2023), and Aslan et al. (2022). A key strength in our study is the use of county-level data.Our sample consists numerous US banks over the 2010–2020 period. As the biodiversity measure, we use a biodiversity index developed by Giglio et al. (2020). The bank-specific data is based on the county of domicile. This strategy improves the precision of the results because differences in biodiversity risk are much larger between counties than between states. Our results lend support that banks consider biodiversity risks because increasing biodiversity risks reduce bank lending growth. Along to Becker et al. (2025) this lend support that banks incorporate nature-related information into their financing decisions.Our results reveal that especially smaller banks are more exposed to biodiversity risks and especially in the latter half of the 2010s. This may be an implication of the increasing awareness of biodiversity-related matters in the 2010s and that the lending growth of the larger banks is not affected by biodiversity risk. The latter might stem from the fact that larger banks have more diversified banking operations and are hence less exposed to local biodiversity risks than those of smaller community banks. Overall, the results strengthen the importance of preserving biodiversity because losses in diversity ultimately lead to losses in economic activity.JEL codes: G2, G21, Q53, Q54, Q56Keywords: banks, lending, bank risk, biodiversity risk