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Financial Stability and Climate Change

Author

Listed:
  • Nikola Fabris

    (Central Bank of Montenegro, Podgorica, Montenegro and Faculty of Economics, Belgrade University, Belgrade, Serbia)

Abstract

Fighting climate change is one of the biggest challenges in the 21st century. Climate change that leads to global warming has been increasingly visible in our environment. Extreme weather conditions such as hurricanes, floods, and droughts have been escalating and their acceleration can be expected in the future. They cause changes in sea levels, epidemics, large fires, etc. Increasingly, we are witnessing minor or major damage caused by these extreme weather conditions. Numerous studies have proven that climate change has negative impact on economic growth and prosperity. However, this paper starts from the premise that in addition to unequivocally identified threats, climate change also creates opportunities. The paper reaches a conclusion that climate change can adversely affect balance sheets of financial institutions. Therefore, climate change is a source of financial risk and thus a part of the mandate of central banks and supervisors in preserving financial stability. This type of risk has not been given enough attention by either supervisors or financial institutions over the past period. This paper develops a model for managing financial risks as a result of climate change.

Suggested Citation

  • Nikola Fabris, 2020. "Financial Stability and Climate Change," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(3), pages 27-43.
    • Handle: RePEc:cbk:journl:v:9:y:2020:i:3:p:27-43
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    File URL: http://www.cbcg.me/repec/cbk/journl/vol9no3-2.pdf
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    References listed on IDEAS

    as
    1. Nikola Fabris, 2018. "Challenges for Modern Monetary Policy," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 7(2), pages 5-24.
    2. Marshall Burke & Kyle Emerick, 2016. "Adaptation to Climate Change: Evidence from US Agriculture," American Economic Journal: Economic Policy, American Economic Association, vol. 8(3), pages 106-140, August.
    3. Martin Gassebner & Alexander Keck & Robert Teh, 2010. "Shaken, Not Stirred: The Impact of Disasters on International Trade," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 351-368, May.
    4. Giuzio, Margherita & Krušec, Dejan & Levels, Anouk & Melo, Ana Sofia & Mikkonen, Katri & Radulova, Petya, 2019. "Climate change and financial stability," Financial Stability Review, European Central Bank, vol. 1.
    5. Radoica Luburić, 2019. "A Model of Crisis Prevention (Based on managing change, quality management and risk management)," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 8(2), pages 33-49.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Nenad Milojević & Srdjan Redzepagic, 2021. "Prospects of Artificial Intelligence and Machine Learning Application in Banking Risk Management," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(3), pages 41-57.
    2. Lingke Wu & Dehong Liu & Tiantian Lin, 2023. "The Impact of Climate Change on Financial Stability," Sustainability, MDPI, vol. 15(15), pages 1-18, July.
    3. Radoica Luburić, 2021. "Crisis Prevention and the Coronavirus Pandemic as a Global and Total Risk of Our Time," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(1), pages 55-74.
    4. Le, Anh-Tuan & Tran, Thao Phuong & Mishra, Anil V., 2023. "Climate risk and bank stability: International evidence," Journal of Multinational Financial Management, Elsevier, vol. 70.
    5. Guillaume Vallet, 2021. "Great Power, Great Responsibility: Addressing the Underestimated Issue of Central Bank’s Social Responsibility," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(3), pages 23-39.
    6. Kayla Stan & Graham A. Watt & Arturo Sanchez-Azofeifa, 2021. "Financial stability in response to climate change in a northern temperate economy," Nature Communications, Nature, vol. 12(1), pages 1-10, December.
    7. Getaneh Mihret Ayele & Fentaw Leykun Fisseha, 2024. "Does climate change affect the financial stability of Sub-Saharan African countries?," Climatic Change, Springer, vol. 177(10), pages 1-22, October.
    8. Peterson K. Ozili & Paul Terhemba Iorember, 2024. "Financial stability and sustainable development," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 2620-2646, July.
    9. Odongo, Maureen & Misati, Roseline Nyakerario & Kageha, Caren & Wamalwa, Peter Simiyu, 2023. "Sustainable financing, climate change risks and bank stability in Kenya," KBA Centre for Research on Financial Markets and Policy Working Paper Series 71, Kenya Bankers Association (KBA).
    10. Carè, R. & Fatima, R. & Boitan, I.A., 2024. "Central banks and climate risks: Where we are and where we are going?," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 1200-1229.
    11. Zhiyuan Gao & Lianqing Li & Yu Hao, 2024. "Financial risk under the shock of global warming: Evidence from China," Business Strategy and the Environment, Wiley Blackwell, vol. 33(2), pages 335-351, February.
    12. Chan, Ying Tung & Punzi, Maria Teresa & Zhao, Hong, 2024. "Green transition and financial stability: The role of green monetary and macroprudential policies and vouchers," Energy Economics, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    climate change; financial stability; financial risks; management;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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