Climate change, systemic risk, and macroprudential policy

Paul Hiebert

Chapter 21 in Research Handbook of Macroprudential Policy, 2026, pp 500-513 from Edward Elgar Publishing

Abstract: This chapter outlines the state of play in measuring potential systemic risks posed by climate change to the financial system, and the contours of a possible macroprudential policy response. It presents a four-step analytical framework to assess climate-related financial risks: identifying the potential for destabilising climate shocks, detailing financial exposures, translating these exposures into risks through interactions with projected financial vulnerabilities, and outlining several amplifiers through which such financial risks could become systemic. Emphasising the importance of granular data and forward-looking methodologies, such as scenario analysis, the chapter discusses potential amplification mechanisms such as nonlinearities and compound shocks, cross-border impacts, economic and financial contagion, alongside the potential for risk transfer from underinsured exposures, which could exacerbate financial system risks that might otherwise appear manageable. The chapter then moves to outline various macroprudential policy options that could enhance financial system resilience, including buffers and concentration limits for banks, borrower-based measures for the real economy, and policies for non-bank financial intermediation, including addressing insurance protection gaps. While considerable strides have been made in recent years in detailing how climate shocks can generate financial risk, continued analytical and policy efforts will be needed to integrate climate risk into existing macroprudential frameworks.

Keywords: Climate Change; Systemic Risk; Macroprudential Policy (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035306206
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