Impact of climate risk on financial stability: Cross-country evidence

Abstract

There is a growing awareness that climate change is a new source of risk to the financial system, but cross-country evidence on the impact of climate risk on financial stability is lacking. This study empirically investigates the impact of climate risk on financial stability using panel data from 2007 to 2019 in 53 countries. The findings of this study reveal that climate risk negatively affects financial stability, and this adverse impact will show differences due to the different levels of economic development, financial development, and competition among countries. Furthermore, macroprudential policies have effectively maintained the financial stability of countries affected by climate risk. However, the macroprudential policies imposed on borrowers are different from balance-based and buffer-based macroprudential tools. In addition, good national governance quality can contain the impact of climate risk on financial stability. After suffering from climate risk, strengthening political stability, improving government efficiency, supervision, and legal system, strictly controlling corruption and improving the right to speak and accountability are conducive to the country's maintenance of financial stability to varying degrees. This study not only enriches the existing research in the field of climate financial risk, but also provides a reference for government departments to reduce the impact of climate risk and maintain financial stability.