Climate Change and Financial Systemic Risk : Evidence from Us Banks and Insurers

In this paper we investigate how financial system stability, assessed through market-based systemic risk measures (SRMs), relates to climate-induced catastrophes and to the structural change caused by the low-carbon transition. We first detect whether, to what extent and how quickly SRMs of the US banking and insurance sectors react to extreme weather events. Overall, we show that some billion-dollar climate disasters exacerbate systemic risk. Moreover, due to the role the financial system plays in supporting firms involved in the low-carbon transition, we indirectly study whether and how the dynamics of the green transition affect US banks and insurers, by examining the relation between their SRMs and market-based green and brown indexes. We observe that a better performance of green companies, which might be associated with the progress in the low-carbon transition, reduces systemic risk of banks and insurers more than that of brown indexes, with an increasing magnitude in the tails of the SRMs distribution. In contrast, a higher riskiness of the green companies seems to worsen banks' and insurers' systemic risk more than brown companies. We believe the results of this study can provide useful insights for the decisions of financial institutions and supervisors about the integration of climate-related risk analysis into their risk management procedures and prudential supervision practices