CLIMATE PHYSICAL RISKS AND THE RESILIENCE OF THE BANKING SECTOR: A MACROPRUDENTIAL PERSPECTIVE
DOI:
https://doi.org/10.7251/ZREFIS2632051PKeywords:
climate risks, financial stability, non-performing loans (NPLs), capital adequacy ratio (CAR), Montenegro, G21, C53, Q54Abstract
This study analyses the impact of climate-related physical risks, with a particular focus on floods, on the financial and macroeconomic stability of Montenegro. Using regression models and stress-test scenarios, the paper examines the relationship between climate shocks and key indicators such as the share of non-performing loans (NPLs), GDP growth, and banks’ capital adequacy ratio (CAR). The findings indicate that extreme climate events significantly increase credit risk, which is reflected in higher NPLs, lower CAR, and adverse effects on economic growth. The simulations suggest that a severe climate shock could double the level of NPLs and substantially undermine banking-sector stability, with potentially broader implications for the fiscal sector and insurance companies. The results confirm that climate risks should be integrated into macroprudential policies, supervisory frameworks, and risk-management strategies, particularly in small and open economies.References
Adrian, Tobias, James Morsink, and Liliana Schumacher. 2020. “Assessing Climate-Change Risk by Stress Testing for Financial Resilience.” IMF Blog, February 5, 2020. https://www.imf.org/en/blogs/articles/2020/02/05/blog-assessing-climate-change-risk-by-stress-testing-for-financial-resilience.
Brunetti, Celso, Benjamin Dennis, Dylan Gates, Diana Hancock, David Ignell, Elizabeth K. Kiser, Gurubala Kotta, Anna Kovner, Richard J. Rosen, and Nicholas K. Tabor. 2021. “Climate Change and Financial Stability.” FEDS Notes. Washington, DC: Board of Governors of the Federal Reserve System, March 19, 2021. https://doi.org/10.17016/2380-7172.2893.
Campiglio, Emanuele, Yannis Dafermos, Pierre Monnin, Josh Ryan-Collins, Gertjan Schotten, and Masazumi Tanaka. 2018. “Climate Change Challenges for Central Banks and Financial Regulators.” Nature Climate Change 8 (6): 462–468. https://doi.org/10.1038/s41558-018-0175-0.
Carè, Rosella. 2023. “Climate-Related Financial Risks: Exploring the Known and Charting the Future.” Current Opinion in Environmental Sustainability 65: 101385. https://doi.org/10.1016/j.cosust.2023.101385.
Carney, Mark. 2015. “Breaking the Tragedy of the Horizon: Climate Change and Financial Stability.” Speech at Lloyd’s of London, London, September 29, 2015. Bank of England. https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability.
Chalabi-Jabado, Fatima, and Ydriss Ziane. 2024. “Climate Risks, Financial Performance and Lending Growth: Evidence from the Banking Industry.” Technological Forecasting and Social Change 209: 123757. https://doi.org/10.1016/j.techfore.2024.123757.
Delis, Manthos D., Konstantinos de Greiff, Maria Iosifidi, and Steven Ongena. 2024. “Being Stranded with Fossil Fuel Reserves? Climate Policy Risk and the Pricing of Bank Loans.” Financial Markets, Institutions & Instruments 33 (3): 239–265. https://doi.org/10.1111/fmii.12189.
Engle, Robert F., and Clive W. J. Granger. 1987. “Co-integration and Error Correction: Representation, Estimation, and Testing.” Econometrica 55 (2): 251–276. https://doi.org/10.2307/1913236.
Estrada, Francisco, Miguel A. Altamirano del Carmen, Oscar Calderon-Bustamante, W. J. Wouter Botzen, Serafin Martinez-Jaramillo, and Stefano Battiston. 2024. “Assessing the Physical Risks of Climate Change for the Financial Sector: A Case Study from Mexico’s Central Bank.” arXiv preprint arXiv:2411.18834. https://arxiv.org/abs/2411.18834.
European Central Bank. 2021. Climate-Related Risk and Financial Stability. Frankfurt: European Central Bank. https://www.ecb.europa.eu/pub/pdf/other/ecb.climateriskfinancialstability202107~87822fae81.en.pdf.
European Central Bank. 2022. 2022 Climate Risk Stress Test. Frankfurt: European Central Bank. https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.climate_stress_test_report.20220708~2e3cc0999f.en.pdf.
Ghosh, Atanu. 2015. “Banking-Industry Specific and Regional Economic Determinants of Non-Performing Loans: Evidence from US States.” Journal of Financial Stability 20: 93–104. https://doi.org/10.1016/j.jfs.2015.08.004.
Imbens, Guido W., and Michal Kolesár. 2016. “Robust Standard Errors in Small Samples: Some Practical Advice.” Review of Economics and Statistics 98 (4): 701–712. https://doi.org/10.1162/rest_a_00552.
International Monetary Fund. 2021. IMF Strategy to Help Members Address Climate Change-Related Policy Challenges: Priorities, Modes of Delivery, and Budget Implications. Washington, DC: International Monetary Fund. https://www.imf.org/en/Publications/Policy-Papers/Issues/2021/07/30/IMF-Strategy-to-Help-Members-Address-Climate-Change-Related-Policy-Challenges-Priorities-463093.
Jessop, Simon, and Virginia Furness. 2024. “African Bank Stress Test Flags Systemic Risks Posed by Nature Loss.” Reuters, July 15, 2024. https://www.reuters.com/business/finance/african-bank-stress-test-flags-systemic-risks-posed-by-nature-loss-2024-07-15/.
Klein, Nir. 2013. “Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance.” IMF Working Paper no. 13/72. https://doi.org/10.5089/9781484318522.001.
Louzis, Dimitrios P., Angelos T. Vouldis, and Vasilios L. Metaxas. 2012. “Macroeconomic and Bank-Specific Determinants of Non-Performing Loans in Greece.” Journal of Banking & Finance 36 (4): 1012–1027. https://doi.org/10.1016/j.jbankfin.2011.10.012.
Makri, Vasiliki, Athanasios Tsagkanos, and Athanasios Bellas. 2014. “Determinants of Non-Performing Loans: The Case of the Eurozone.” Panoeconomicus 61 (2): 193–206. https://doi.org/10.2298/PAN1402193M.
Messai, Ahlem S., and Fathi Jouini. 2013. “Micro and Macro Determinants of Non-Performing Loans.” International Journal of Economics and Financial Issues 3 (4): 852–860. https://www.econjournals.com/index.php/ijefi/article/view/517.
Network for Greening the Financial System. 2020a. Guide for Supervisors: Integrating Climate-Related and Environmental Risks into Prudential Supervision. Paris: Network for Greening the Financial System. https://www.ngfs.net/en/publications-and-statistics/publications/guide-supervisors-integrating-climate-related-and-environmental-risks-prudential-supervision.
Network for Greening the Financial System. 2020b. Guide to Climate Scenario Analysis for Central Banks and Supervisors. Paris: Network for Greening the Financial System. https://www.ngfs.net/en/publications-and-statistics/publications/old-guide-climate-scenario-analysis-central-banks-and-supervisors-2020-version.
Network for Greening the Financial System. 2024. Scenarios in Action: A Progress Report on Global Supervisory and Central Bank Climate Scenario Exercises. Paris: Network for Greening the Financial System. https://www.ngfs.net/en/publications-and-statistics/publications/scenarios-action-progress-report-global-supervisory-and-central-bank-climate-scenario-exercises.
Roncoroni, Andrea, Stefano Battiston, Luis O. Escobar-Farfán, and Sergio Martinez-Jaramillo. 2021. “Climate Risk and Financial Stability in the Network of Banks and Investment Funds.” Journal of Financial Stability 54: 100870. https://doi.org/10.1016/j.jfs.2021.100870.
World Bank. 2024. Double Trouble? Assessing Climate Physical and Transition Risks for the Moroccan Banking Sector. Washington, DC: World Bank. https://openknowledge.worldbank.org/entities/publication/bc559168-cb93-445c-b70a-969a98a83024.
Published
Issue
Section
License
Copyright (c) 2026 Zbornik radova Ekonomskog fakulteta u Istočnom Sarajevu
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
