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

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  • Antoine Mandel

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Timothy Tiggeloven

    (VU - Vrije Universiteit Amsterdam [Amsterdam])

  • Daniel Lincke

    (Global Climate Forum e.V.)

  • Elco Koks

    (VU - Vrije Universiteit Amsterdam [Amsterdam])

  • Philip Ward

    (VU - Vrije Universiteit Amsterdam [Amsterdam])

  • Jochen Hinkel

    (Global Climate Forum e.V.)

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 developping 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 coun

Suggested Citation

  • Antoine Mandel & Timothy Tiggeloven & Daniel Lincke & Elco Koks & Philip Ward & Jochen Hinkel, 2021. "Risks on global financial stability induced by climate change: the case of flood risks," Post-Print halshs-03523343, HAL.
    • Handle: RePEc:hal:journl:halshs-03523343
    DOI: 10.1007/s10584-021-03092-2
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03523343
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    4. Gourdel, Régis & Sydow, Matthias, 2022. "Non-banks contagion and the uneven mitigation of climate risk," Working Paper Series 2757, European Central Bank.
    5. Hao Dong & Tao Li, 2023. "Climate Economics and Finance: A Literature Review," Climate Economics and Finance, Anser Press, vol. 1(1), pages 29-45, November.
    6. Dong, Xiyong & Yoon, Seong-Min, 2023. "Effect of weather and environmental attentions on financial system risks: Evidence from Chinese high- and low-carbon assets," Energy Economics, Elsevier, vol. 121(C).
    7. Chan, Ying Tung & Punzi, Maria Teresa & Zhao, Hong, 2024. "Green transition and financial stability: The role of green monetary and macroprudential policies and vouchers," Energy Economics, Elsevier, vol. 132(C).
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    9. Pagnottoni, Paolo & Spelta, Alessandro & Flori, Andrea & Pammolli, Fabio, 2022. "Climate change and financial stability: Natural disaster impacts on global stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 599(C).

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    Financial Stability; Climate Impacts; Flood Risks;
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