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Climate-induced liquidity crises: interbank exposures and macroprudential implications

Author

Listed:
  • Paola D'Orazio

    (Chair of Economics, Faculty of Economics and Business Administration, Technische Universitaet Chemnitz)

  • Jessica Reale

    (Institute for Macroeconomics, Faculty of Economics and Management, Ruhr-Universitaet Bochum)

  • Anh Duy Pham

    (Department of Computer Science, Hochschule Bonn-Rhein-Sieg)

Abstract

Although climate-induced liquidity risks can cause significant disruptions and instabilities in the financial sector, they are frequently overlooked in current debates and policy discussions. This paper proposes a macro-financial agent-based integrated assessment model to investigate the transmission channels of climate risks to financial instability and study the emergence of liquidity crises through interbank market dynamics. Our simulations show that the financial system could experience serious funding and market liquidity shortages due to climate-induced liquidity crises. Our investigation contributes to our understanding of the impact - and possible solutions - to climate-induced liquidity crises, besides the issue of asset stranding related to transition risks usually considered in the existing studies.

Suggested Citation

  • Paola D'Orazio & Jessica Reale & Anh Duy Pham, 2023. "Climate-induced liquidity crises: interbank exposures and macroprudential implications," Chemnitz Economic Papers 059, Department of Economics, Chemnitz University of Technology.
    • Handle: RePEc:tch:wpaper:cep059
    as

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    File URL: https://www.tu-chemnitz.de/wirtschaft/vwl1/RePEc/download/tch/wpaper/CEP059_DOrazio.pdf
    File Function: First version, 2023
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    References listed on IDEAS

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    Cited by:

    1. 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.

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    Keywords

    Agent-Based Modeling; Climate Risks; Prudential Regulation; Interbank Market; Liquidity Crises;
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