Risks on global financial stability induced by climate change: the case of flood risks

Antoine Mandel, Timothy Tiggeloven, Daniel Lincke, Elco Koks, Philip Ward and Jochen Hinkel
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Timothy Tiggeloven: Vrije Universiteit Amsterdam
Daniel Lincke: Global Climate Forum
Elco Koks: Vrije Universiteit Amsterdam
Philip Ward: Vrije Universiteit Amsterdam
Jochen Hinkel: Global Climate Forum

Climatic Change, 2021, vol. 166, issue 1, No 4, 24 pages

Abstract: Abstract There is increasing concern among financial regulators that changes in the distribution and frequency of extreme weather events induced by climate change could pose a threat to global financial stability. We assess this risk, for the case of floods, by developing a simple model of the propagation of climate-induced shocks through financial networks. We show that the magnitude of global risks is determined by the interplay between the exposure of countries to climate-related natural hazards and their financial leverage. Climate change induces a shift in the distribution of impacts towards high-income countries and thus larger amplification of impacts as the financial sectors of high-income countries are more leveraged. Conversely, high-income countries are more exposed to financial shocks. In high-end climate scenarios, this could lead to the emergence of systemic risk as total impacts become commensurate with the capital of the banking sectors of countries that are hubs of the global financial network. Adaptation policy, or the lack thereof, appears to be one of the key risk drivers as it determines the future exposure of high-income countries. This implies in particular that the avoided costs in terms of financial stability should be weighted in as benefits of adaptation policy.

Keywords: Financial stability; Climate impacts; Flood risks (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (10)

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Working Paper: Risks on global financial stability induced by climate change: the case of flood risks (2021)
Working Paper: Risks on global financial stability induced by climate change: the case of flood risks (2021)
Working Paper: Risks on global financial stability induced by climate change: the case of flood risks (2021)
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DOI: 10.1007/s10584-021-03092-2

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