CLIMSTAB

The project Climate Shocks and Banking Stability explores how climate shocks—particularly those driven by the El Niño-Southern Oscillation (ENSO) and the North Atlantic Oscillation (NAO)—affect the stability of banking systems in the U.S. and Europe. With climate change intensifying the frequency and severity of extreme weather events, financial institutions face increasing risks. This research aims to deepen our understanding of how these events influence banking stability. The study examines key resilience factors such as bank capitalization, provisions for bad loans, liquidity, and diversification (both geographical and financial) to determine what characteristics help banks better withstand extreme climate shocks. By identifying these heterogeneities, the research offers insights into which banking models and regulatory frameworks are best equipped to enhance resilience in the face of climate risks. Using a novel approach, the project combines geolocated banking data with advanced climate indices and teleconnections to assess climate variability at a granular, microeconomic level. It also takes a forward-looking perspective, evaluating how different global warming scenarios might exacerbate risks to bank stability in the future. The dual geographic focus allows for a detailed analysis of ENSO’s effects on the U.S. with quarterly data and extends the study to Europe, where NAO is the dominant climate driver. This multidisciplinary project, intersecting climatology, financial economics, and econometrics, will develop policy recommendations on banking regulation and supervision. By addressing key questions on climate shocks’ destabilizing effects, transmission mechanisms, and future risks, the study provides actionable insights to enhance financial sector resilience.