This paper develops a factor-based framework to measure US banks’ exposure to physical climate risk. Using monthly temperature data, we estimate that the US banking sector’s systemic physical climate risk is approximately 500 billion dollars, equivalent to roughly one-quarter of the sector’s reported equity, by the late 2010s. Exposed banks also reduce lending to small businesses, especially in counties without branches. The framework offers a scalable, disclosure-free measure of physical climate risk, illustrating how climate vulnerabilities are transmitted into credit markets and have direct implications for supervision and stress testing.
