Anticipating the Unforeseen and Expecting the Unexpected: Effectiveness of Macro-Prudential Policies in Curbing the Impact of Stranded Assets in the Banking Sector

Chekani Nkwaira () and Huibrecht Margaretha Van der Poll
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Chekani Nkwaira: Sustainable Livelihoods, Graduate School of Business Leadership (SBL), University of South Africa (UNISA), P.O. Box 392, Pretoria 0002, South Africa
Huibrecht Margaretha Van der Poll: Sustainable Livelihoods, Graduate School of Business Leadership (SBL), University of South Africa (UNISA), P.O. Box 392, Pretoria 0002, South Africa

Risks, 2023, vol. 11, issue 5, 1-16

Abstract: Banks are exposed to climate risks through stranded assets. This risk can be substantial in the banking sector, as it can spawn systemic risk. After the Great Recession, macro-prudential instruments effectively addressed systemic risk. However, climatic risks raise the research question of how feasible it is to address them by adopting macro-prudential instruments. The researchers, therefore, investigate how banks can respond to the risk posed by stranded assets through the framework of using macro-prudential instruments. A semi-systematic review of the related literature is carried out based on the researchers’ aim to evaluate theory evidence in the effectiveness of macro-prudential instruments in addressing climate-related risks. The adaptability of macro-prudential instruments to address climatic risks and, by implication, systemic risk is demonstrated in the findings. The researchers develop a framework constituting climate transparency disclosures, climate capital requirement ratio, climate capital conservation, carbon countercyclical buffer and macro-prudential climate stress tests to mitigate the effects of climate risks in banking.

Keywords: capital adequacy; capital ratio; carbon countercyclical buffer; climate disclosures; climate risks; climate stress tests; macro-prudential instruments; risk weights; stranded assets; systemic risk (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2023
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