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Climate-Related Prudential Risks in the Banking Sector: A Review of the Emerging Regulatory and Supervisory Practices

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  • Mete Feridun

    (Department of Banking and Finance, Faculty of Business and Economics, Eastern Mediterranean University, Famagusta, North Cyprus, via Mersin 10, Turkey)

  • Hasan Güngör

    (Department of Economics, Faculty of Business and Economics, Eastern Mediterranean University, Famagusta, North Cyprus, via Mersin 10, Turkey)

Abstract

This article reviews emerging regulatory and supervisory practices with respect to prudential risks from climate change in the banking sector. It evaluates the theoretical considerations with respect to climate-related financial risks in the banking sector, reviews the related academic literature, and analyzes the policy-related publications from various regulatory authorities. As a result of this assessment, the article concludes that the major regulatory and supervisory expectations can be categorized into four key areas: (i) board-level attention to climate risks and integrating them into internal governance frameworks, (ii) embedding climate risks into strategies and overall risk management frameworks, (iii) identifying climate-related material exposures and disclosure of relevant key metrics, and (iv) assessing capital impact from climate risk through scenario analysis and stress testing. The article also presents a number of implications for banks and banking regulators in other jurisdictions to help them identify the actions required to address climate change risks in the banking sector.

Suggested Citation

  • Mete Feridun & Hasan Güngör, 2020. "Climate-Related Prudential Risks in the Banking Sector: A Review of the Emerging Regulatory and Supervisory Practices," Sustainability, MDPI, vol. 12(13), pages 1-20, July.
    • Handle: RePEc:gam:jsusta:v:12:y:2020:i:13:p:5325-:d:378973
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    References listed on IDEAS

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    3. Waldemar Karpa & Antonio Grginović, 2021. "(Not So) Stranded: The Case of Coal in Poland," Energies, MDPI, vol. 14(24), pages 1-16, December.
    4. Daniel Ramos-García & Carmen López-Martín & Raquel Arguedas-Sanz, 2023. "Climate transition risk in determining credit risk: evidence from firms listed on the STOXX Europe 600 index," Empirical Economics, Springer, vol. 65(5), pages 2091-2114, November.
    5. Ho, Kelvin & Wong, Andrew, 2023. "Effect of climate-related risk on the costs of bank loans: Evidence from syndicated loan markets in emerging economies," Emerging Markets Review, Elsevier, vol. 55(C).
    6. Esther Ortiz-Martínez & Salvador Marín-Hernández, 2020. "European Financial Services SMEs: Language in Their Sustainability Reporting," Sustainability, MDPI, vol. 12(20), pages 1-20, October.
    7. Aldina Lopes Santos & Lúcia Lima Rodrigues, 2021. "Banks and Climate-Related Information: The Case of Portugal," Sustainability, MDPI, vol. 13(21), pages 1-20, November.
    8. Dervis Kirikkaleli & Tomiwa Sunday Adebayo, 2021. "Do renewable energy consumption and financial development matter for environmental sustainability? New global evidence," Sustainable Development, John Wiley & Sons, Ltd., vol. 29(4), pages 583-594, July.
    9. Venturini, Alessio, 2022. "Climate change, risk factors and stock returns: A review of the literature," International Review of Financial Analysis, Elsevier, vol. 79(C).
    10. Pejman Peykani & Mostafa Sargolzaei & Mohammad Hashem Botshekan & Camelia Oprean-Stan & Amir Takaloo, 2023. "Optimization of Asset and Liability Management of Banks with Minimum Possible Changes," Mathematics, MDPI, vol. 11(12), pages 1-24, June.
    11. Elena G. Shershneva, 2024. "CAMELS parameters’ impact on the risk of losing financial stability: The case of Russian banks," Journal of New Economy, Ural State University of Economics, vol. 25(2), pages 130-152, July.
    12. Chabot, Miia & Bertrand, Jean-Louis, 2023. "Climate risks and financial stability: Evidence from the European financial system," Journal of Financial Stability, Elsevier, vol. 69(C).
    13. Orkun Bayram & Isilay Talay & Mete Feridun, 2022. "Can Fintech Promote Sustainable Finance? Policy Lessons from the Case of Turkey," Sustainability, MDPI, vol. 14(19), pages 1-25, September.

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