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

Michael Grill, Alexandra Popescu () and Elena Rancoita
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Michael Grill: ECB - European Central Bank - European Central Bank
Alexandra Popescu: LéP [Poitiers] - Laboratoire d'économie de Poitiers [UR 13822] - UP - Université de Poitiers = University of Poitiers
Elena Rancoita: ECB - European Central Bank - European Central Bank

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Abstract: 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: 2026-03-31
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Published in Macroeconomic Dynamics, 2026, 30, pp.e23. ⟨10.1017/S1365100526100947⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05635098

DOI: 10.1017/S1365100526100947

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