Wildfires and financial stability of U.S. regional banks in California

• This paper examines the impact of wildfires on the financial stability of banks. • We use bank-level yearly panel data of 57 U.S. regional banks during 2010–2024. • We find that wildfire damage and destruction of structures decrease financial stability. • We find that mainly leverage risk and portfolio risk drive the decrease in financial stability. Wildfires represent one of the most visible and devastating consequences of climate change. Yet, their effects on the banking system are under-researched. This paper examines how wildfires – captured by the damage and destruction of structures – affect the financial stability of regional banks in California. Using a panel of 57 regional banks in California over fifteen years (2010–2024), we find that wildfires go together with lower financial stability of banks as measured by the Z-score. A rich set of bank-related and macroeconomic controls support the robustness of this finding.