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European Non-Performing Exposures (NPEs) and Climate-Related Risks: Country Dimensions

Author

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  • Elisa Di Febo

    (Department of Economic Studies, University of “G. d’Annunzio” of Chieti-Pescara, Viale Pindaro, 42, 65127 Pescara, Italy)

  • Eliana Angelini

    (Department of Economic Studies, University of “G. d’Annunzio” of Chieti-Pescara, Viale Pindaro, 42, 65127 Pescara, Italy)

  • Tu Le

    (Faculty of Finance & Banking, University of Economics and Law, Ho Chi Minh City 700000, Vietnam
    Vietnam National University, Ho Chi Minh City 700000, Vietnam
    International Centre for Economic Analysis (ICEA), Waterloo, ON N2L 3C5, Canada)

Abstract

The EU faces two economic challenges: managing non-performing exposures (NPEs) and climate change. This paper analyzes the relationship between the NPEs of domestic banking groups and climate risks, including macroeconomic variables such as the GDP growth rate, unemployment rate (UnEmp), and the voice and accountability percentile (VCA) and the interaction variable between the GHG and the Rule of Law Percentile (GhGRLP). The estimation uses ordinary least squares with time-fixed and individual effects. Physical and transition risks significantly affect NPEs, showing that both adverse climate events and the transition to a low-carbon economy worsen the financial situation of European banking institutions. The analysis also revealed that increased levels of VCA lead to a rise in NPEs, while an increase in GhGRLP reduces NPEs. In contrast, financial institutions tend to recognize and report NPEs more accurately in contexts with greater transparency and accountability. In comparison, UnEmp negatively affects NPEs, suggesting that economic support measures during high unemployment can reduce NPEs in the subsequent period. In conclusion, climate risk management represents a crucial challenge for the financial stability of banking institutions. Policymakers and financial institutions must continue to develop and implement climate change mitigation and adaptation strategies to preserve financial system stability amid growing climate uncertainties.

Suggested Citation

  • Elisa Di Febo & Eliana Angelini & Tu Le, 2024. "European Non-Performing Exposures (NPEs) and Climate-Related Risks: Country Dimensions," Risks, MDPI, vol. 12(8), pages 1-15, August.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:8:p:128-:d:1455540
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    References listed on IDEAS

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