A new study published in the journal Nature Climate Change highlights how climate-related damages impact on the stability of the global banking system.
Climate-related damages can significantly affect the stability of the global financial system. This is what emerges from a new study published in the prestigious journal Nature Climate Change and carried out by an international team of researchers from the GROWINPRO project, CMCC Foundation, RFF-CMCC European Institute on Economics and the Environment (EIEE), Scuola Superiore Sant’Anna, Bocconi University and Politecnico di Milano (Italy).
A new line of research started to study the impacts of climate change and climate-related extreme events, such as floods, landslides or storm surges, on the financial system. This new study, published in Nature Climate Change, contributes to the debate by analyzing the impacts of climate change on the stability of the global banking system while quantifying banking crises and the public costs of bailing out insolvent banks.
The results suggest that climate change will increase the frequency of banking crises from +26% up to 248%, while rescuing insolvent banks will cause an additional fiscal burden of approximately 5% to 15% of GDP per year and an increase of public debt to GDP by a factor of 2 in the year 2100.
“The idea behind our research was to understand how the impacts of climate change will affect the global banking system’’ explains the study’s lead-author and GROWINPRO researcher Francesco Lamperti: “Actually, the impacts concern firms because climate change affects and reduces the productivity of labour and the stock and quality of capital. However, cascades of firms’ bankruptcies induced by climate damages might affect the financial system. In particular we sought to understand how the global banking system could be challenged by firms’ insolvency, quantifying banking crises and the public costs of bailing out insolvent banks’’.
“The main result”, adds Massimo Tavoni, director of RFF-CMCC European Institute on Economics and the Environment and professor at Politecnico di Milano, “is that climate damages significantly reverberate to the financial system: our results clearly show that firms’ survival likelihood reduces almost three times, while the risk of banking crises doubles. This entails further costs, that is an additional fiscal burden of approximately 5% to 15% of GDP per year to absorb losses and rescue insolvent banks”.
“We discussed about the direct damages that climate change exerts on economic growth while trying to establish the contribution of climate-induced financial distress to such a shrinkage of economic performances. We found out that around 20% of growth rates reduction observed is attributable to financial’’, says Valentina Bosetti, senior scientist at RFF-CMCC European Institute on Economics and the Environment and professor at Bocconi University in Milan.
The study focuses also on the possible measures that financial regulation authorities can implement to manage and mitigate climate-related risks. According to Andrea Roventini, principal investigator of the GROWINPRO project and professor at Scuola Superiore Sant’Anna, “the study highlights that financial regulation authorities can modify banks’ capital requirements, accounting for the impact of climate damages on firm solvency while reducing risks to the financial sector’’.