Climate change, bank liquidity and systemic risk

Margherita Giuzio, Bige Kahraman and Jasper Knyphausen

No 3168, Working Paper Series from European Central Bank

Abstract: This paper examines the relevance of banks’ exposure to climate transition risk in the interbank lending market. Using transaction-level data on repo agreements, we first establish that banks with higher exposure to transition risk face significantly higher borrowing costs. This premium is a combination of a risk premium, compensating lenders for increased credit risk, and an inconvenience premium, reflecting the sustainability preferences of key dealer banks. We also find that the transition risk premium intensifies during periods of financial stress, indicating that climate-induced risks amplify existing vulnerabilities in financial markets. Furthermore, the rate segmentation caused by transition risk premium has implications for the transmission of monetary policy. Transition risk is an important factor in financial stability and policy design. JEL Classification: Q54, G21, G32, Q58

Keywords: climate finance; financial stability; repo markets; risk premium; transition risk (search for similar items in EconPapers)
Date: 2026-01
Note: 3546207
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263168

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