Climate change and financial risk: Is there a role for central banks?

Abstract

We hypothesize and test how climate change (CC) impacts financial risks (FR) and the effectiveness of central banks' green policies (CBGP) in mitigating these effects. Using data from 115 countries, our analysis reveals that climate change, particularly through events like wildfires and floods, significantly heightens FR. However, CBGP is found to moderate this relationship, reducing the adverse effects of CC on FR. Specifically, two components of CBGP—requirement policies and green finance—are identified as the most effective tools in alleviating the FR associated with climate change. Additionally, our study highlights that the moderating effect of CBGP varies depending on a country's credit risk profile, with CC exerting a pronounced impact on FR in countries with large-scale credit markets.

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