Carbon-related credit concentration and banking systemic risk due to climate transition shocks

Chao Wang, Chenfang Jia and Xiaoxing Liu

International Review of Financial Analysis, 2025, vol. 105, issue C

Abstract: Limitations on carbon emissions imposed during a low-carbon economic and social transition exert significant pressure on carbon-intensive industries. The resulting climate transition shocks are transmitted to the banking sector through credit assets and may even trigger systemic risks. This study assesses the impact of climate transition shocks on the banking sector in China by evaluating impairment losses on credit assets across various carbon emission reduction scenarios. Moreover, we integrate the dual transmission channels of the interbank and credit markets to measure banking systemic risk arising from climate transition shocks. Furthermore, we examine the impact of carbon-related credit concentration on systemic risk. Findings indicate that carbon-related credit concentration exacerbates systemic risk within the banking sector in the context of climate transition shocks. The extent of climate transition shocks and the complexity of financial networks contribute to this phenomenon. The findings provide empirical evidence regarding the potential systemic threat posed by concentrated carbon-related credit exposures. This study offers valuable insights for the maintenance of financial stability through the implementation of moderate green credit policies and carbon-focused macroprudential regulations.

Keywords: Credit concentration; Climate transition; Network complexity; Systemic risk (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:105:y:2025:i:c:s1057521925004983

DOI: 10.1016/j.irfa.2025.104411

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