Carbon exposure of credit assets and banking systemic risk caused by climate transition

Chao Wang, Mengyuan Hu, Jiayi Lu and Xiaoxing Liu

Research in International Business and Finance, 2025, vol. 77, issue PB

Abstract: With the increasingly pressing problem of climate change, the carbon tax has gradually developed into an effective tool to limit carbon emissions. However, the imposition of a carbon tax will generate stranded assets, which further transmit climate transition shocks to the banking sector, potentially even leading to systemic risks. This study proposes a theoretical method for quantifying climate transition risks using the carbon tax, which provides a viable approach for integrating climate-related factors into financial systemic risk modeling. According to carbon tax scenarios of different low-carbon transition pathways, this study measures the banking systemic risk caused by climate transition. It further defines carbon exposures of the banking’s credit assets to explore how this climate-related systemic risk is formed from the perspective of stranded assets. The results show that carbon exposure of credit assets promotes banking systemic risk caused by climate transition, with the effect varying across banks of different sizes. Therefore, different types of banks should actively replace their high-carbon credit assets with diversified green investments by exploiting their own advantages. In addition, intense market competition increases the carbon exposure of banks’ credit assets, which further aggravates banking systemic risk. Green credit policy magnifies the impact of market competition. These findings highlight that a financial regulatory framework that incorporates climate factors is necessary. The financial regulatory policies need to be dynamically adjusted according to market situations to adapt to climate-related uncertainty. The early implementation of a moderate climate policy helps to prevent emerging systemic risks caused by climate transition, which offers important insight for the supervision of financial stability.

Keywords: Carbon Exposure; Carbon Tax; Stranded Asset; Transition Risk; Systemic Risk (search for similar items in EconPapers)
JEL-codes: G21 G32 Q5 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:77:y:2025:i:pb:s0275531925002363

DOI: 10.1016/j.ribaf.2025.102980

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