Climate Change and Systemic Risk: Evidence from Financial Intermediaries

The authors investigate the impact of climate-induced temperature shocks on systemic risk within the banking sector. Using a sample of 35 financial intermediaries across 13 countries and employing the ΔCoVaR methodology, the authors find that deviations from historical temperature averages are associated with heightened systemic risk, concluding that climate volatility threatens financial stability by amplifying credit risk and reducing lending capacity. The findings call on regulators to advance climate-sensitive stress testing and strengthen disclosure requirements, and on institutional risk managers to rebalance portfolios and adapt credit policies to better account for climate-related exposures.