The Impact of Biodiversity Risk on Banks’ Credit Default Swap Spread Changes

Abstract

This paper explores the impact of biodiversity risk on banks’ credit risk using a news- based biodiversity index and CDS of 39 global banks between 2015 and 2023. Using a linear OLS regression, this paper finds evidence for a significant positive relationship between biodiversity news and CDS spread changes, where negative news leads to increasing CDS prices. Furthermore, cross-sectional analyses are conducted to test for heterogeneity. Using the Kunming Declaration in 2021 as an external
shock, this paper finds evidence that the relationship persists for the period after the Kunming Declaration, suggesting no significant effect of biodiversity risk before. Further tests reveal no significant impact of a country’s state of biodiversity. In contrast, since the Kunming Declaration, the relationship is stronger for banks which openly disclose biodiversity risks. Banks located in the USA, the only UN nation which is not a member of the CBD, experience a weaker effect of biodiversity news on
CDS spread changes. These results show that banks are subject to biodiversity-related credit risks, where expectations of new
policies and regulation following the Kunming Declaration significantly affect banks’ CDS spreads.

Keywords: biodiversity; banking; credit default swaps; credit risk