Studies and reports

Climate-related risk and financial stability

A long-term scenario analysis for EU banks, investment funds and insurers suggest that credit and market risk could increase as a result of a failure to effectively counteract global warming, according to a joint report by the European Central Bank (ECB) and the European Systemic Risk Board (ESRB).

In particular, the report finds that riverine flooding is the most widespread risk for EU financial institutions. Although a combination of other natural hazards such as wildfires, heat and water stress could amplify that vulnerability in some regions. Those vulnerabilities would specially be borne by weakly capitalised and/or less profitable banks.

The authors conclude that credit exposures may be aggravated by the need for very large portfolio adjustments for investments by a broader spectrum of non-bank financial intermediaries. This market risk may come via a potentially sizeable repricing of climate-related risk.

The CSSF echoes the words from the president of the ECB and ESRB chairwoman, Christine Lagarde, on the fact that the report’s findings underline the urgent need for effective climate policies and economic transition.

Notwithstanding the notable progress made on granular risk mapping covering physical and transition risk drivers, we need to continue working on refining the tools to measure the impacts of climate change on financial stability.