Climate risks and financial stability: Evidence from the European financial system (2023)

Journal of Financial Stability. 69: 101190
Miia Chabot, Jean-Louis Bertrand
https://www.sciencedirect.com/science/article/abs/pii/S1572308923000906

Summary

Climate-related risks have become a major concern for financial regulators and can pose a significant threat to financial stability. In this paper, we first propose a theoretical framework for the transmission of climate risks to financial institutions and the financial system. We then estimate the influence of physical and transition risks on the European financial system through bank-level and system-wide financial stability measures. Our analyses reveal that Scope 3 greenhouse gas emissions, as well as chronic and acute climate risks, negatively affect financial stability at both the level of financial institutions and the system as a whole. Temperature anomalies, heatwaves, wildfires, and droughts are among the most significant risks. As Europe warms twice as fast as the rest of the world, our theoretical and empirical results encourage regulators to mandate the assessment and disclosure of climate risks by firms to allow banks to adjust their prudential capital requirements.

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