Climate transition risk in the banking sector: what can prudential regulation do?

Michael Grill, Alexandra Popescu and Elena Rancoita

Macroeconomic Dynamics, 2026, vol. 30, -

Abstract: Climate-related transition risks are expected to escalate in the coming years, posing potentially significant threats to the banking system. This paper employs a DSGE model that incorporates heterogeneous firms and financial frictions to demonstrate the need to explicitly address climate-related risks in the prudential framework. Our findings indicate that failing to acknowledge transition risk can lead to excessive risk-taking by banks, thereby increasing the volatility of lending and output. With the introduction of climate-related prudential policies, banks are less exposed to transition risk and more efficient in allocating capital.

Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:30:y:2026:i::p:-_23

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