The effects of climate change-related risks on banks: a literature review

The scope of the review is to describe the recent empirical literature in economics and finance focusing on how banks are affected by climate change, with a particular emphasis on microeconomic evidence. Many of the studies which analyse the impacts of climate change on the economy and the financial system rely on modelling assumptions at the macroeconomic level. In order to improve upon these assessments, granular information is required on the effect of climate change on specific portfolios, which will then help calibrate the models used for stress tests.

The particular focus of the paper is to understand the reason why the impact on banks as observed so far is relatively moderate. The authors consider two alternative hypotheses: whether the risk is effectively small, or negligible, or whether it is mispriced by banks or markets, which would be more a source of concern for supervisors.

The authors investigate the effects of climate change on three metrics: credit risk, market risk and lending standards. They also discuss the impact of climate change on particular portfolios, namely residential and corporate real estate, as well as more generally the effects of climate change on non-financial corporates as well as central and local governments (states and municipalities). The authors also broaden the perspective by considering macroeconomic interactions, as well as second round effects, which are not negligible in the analysis.

All in all, the main contribution of the paper is to provide a distribution of impact of climate change across the papers under review, considering credit spreads, bond spreads, expected returns on non-financial corporate equity, and real estate prices.