Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322520 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 11958
Publisher: 
CESifo GmbH, Munich
Abstract: 
This study provides new panel evidence on the effects on climate risk on financial stability in the European banking sector using yearly data over the period 2000-2021. More specifically, the impact of a number of climate risk indices on the Z-score (capturing the probability of default of a country's banking system) is assessed after controlling for various macro and bank-related factors. The estimation is carried out using the GMM method. The analysis is also performed for two subsets of countries, namely EU (European Union) and non-EU ones. Finally, the role of governance quality is investigated. The results suggest that higher emissions growth tends to be associated with lower Z-scores, which indicate lower financial stability. However, the size of this effect differs between EU and non-EU European countries, suggesting that differences in policies, regulatory environments, and economic structures may influence how emissions growth affects financial stability across these areas. Our analysis also shows that the climate risk–financial stability relationship is affected by the quality of governance since the WGI (World Governance Index) does not appear to have a mitigating effect in non-EU countries with poorer governance.
Subjects: 
climate risk
financial stability
Z-score
Europe
panel data
GMM (Generalized Method of Moments) estimator
JEL: 
C33
G12
G18
Document Type: 
Working Paper
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