Today, climate change and climate-related risks that affect the global economy are concrete threats to economies and the stability of financial intermediaries. Our paper aims to analyze the impact of climate-related risks on the loan quality of European commercial banks, focusing on a dataset comprising 127 banks across 14 European countries from 2005 to 2023. The estimation uses the ordinary least square with time fixed and individual effect. This study offers a comprehensive view of how climate change affects credit risk by evaluating transition risks, such as those associated with regulatory changes for carbon dioxide emissions mitigation, and physical risks, including economic losses from climate events. The findings reveal a significant positive correlation between higher levels of climate-related risks and impaired loans, underscoring the threat to financial stability. Additionally, the study uniquely explores the role of governance, demonstrating that effective government policies can mitigate these adverse effects, particularly for smaller banks. These insights are vital for financial regulators and bank managers, highlighting the necessity of integrating climate risk considerations into banking operations and policy-making to bolster the financial system’s resilience.
Loan quality and credit risk in European banking sector: the impact of the climate change
Elisa Di Febo
;Eliana Angelini;
2024-01-01
Abstract
Today, climate change and climate-related risks that affect the global economy are concrete threats to economies and the stability of financial intermediaries. Our paper aims to analyze the impact of climate-related risks on the loan quality of European commercial banks, focusing on a dataset comprising 127 banks across 14 European countries from 2005 to 2023. The estimation uses the ordinary least square with time fixed and individual effect. This study offers a comprehensive view of how climate change affects credit risk by evaluating transition risks, such as those associated with regulatory changes for carbon dioxide emissions mitigation, and physical risks, including economic losses from climate events. The findings reveal a significant positive correlation between higher levels of climate-related risks and impaired loans, underscoring the threat to financial stability. Additionally, the study uniquely explores the role of governance, demonstrating that effective government policies can mitigate these adverse effects, particularly for smaller banks. These insights are vital for financial regulators and bank managers, highlighting the necessity of integrating climate risk considerations into banking operations and policy-making to bolster the financial system’s resilience.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
