Risks on Global Financial Stability Induced by Climate Change

25 Pages Posted: 8 Jul 2020 Last revised: 12 Feb 2021

See all articles by Antoine Mandel

Antoine Mandel

Université Paris I Panthéon-Sorbonne; Climate Finance Alpha

Timothy Tiggeloven

affiliation not provided to SSRN

Daniel Lincke

affiliation not provided to SSRN

Elco Koks

VU University Amsterdam - Institute for Environmental Studies (IVM)

Philip Ward

affiliation not provided to SSRN

Jochen hinkel

affiliation not provided to SSRN

Date Written: June 15, 2020

Abstract

There is increasing concern among financial regulators that changes in the distribution and frequency of extreme weather events induced by climate change could pose a threat to global financial stability. In order to assess this risk, we develop a simple model of the propagation of climate-induced shocks through financial networks. Weshow that the magnitude of global risks is determined by the interplay between the exposure of countries to climate-related natural hazards and their financial leverage. Climate change induces a shift in the distribution of impacts towards high-income countries and a thus larger amplification of impacts as the financial sectors of high-income countries are more leveraged. Conversely, high-income countries are more exposed to financial shocks. In high-end climate scenarios, this could lead to the emergence of systemic risk as total impacts become commensurate with the capital of the banking sectors of countries that are hubs of the global financial network. Adaptation policy, or the lack thereof, appears to be one of the key risk drivers as it determines the future exposure of high-income countries.

Keywords: Climate Change, Financial Risks,

JEL Classification: G01, Q54

Suggested Citation

Mandel, Antoine and Mandel, Antoine and Tiggeloven, Timothy and Lincke, Daniel and Koks, Elco and Ward, Philip and hinkel, Jochen, Risks on Global Financial Stability Induced by Climate Change (June 15, 2020). Available at SSRN: https://ssrn.com/abstract=3626936 or http://dx.doi.org/10.2139/ssrn.3626936

Antoine Mandel (Contact Author)

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

Climate Finance Alpha ( email )

20 rue de Vintimille
PARIS 9E ARRONDISSEMENT, 75009

Timothy Tiggeloven

affiliation not provided to SSRN

Daniel Lincke

affiliation not provided to SSRN

Elco Koks

VU University Amsterdam - Institute for Environmental Studies (IVM) ( email )

De Boelelaan 1115
Amsterdam, 1081 HV
Netherlands

Philip Ward

affiliation not provided to SSRN

Jochen Hinkel

affiliation not provided to SSRN

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