Analysis of Climate Risk in the Stability of the Banking System: Towards Green Macroprudential Regulation

Abstract

Climate change poses a systemic threat to the stability of the financial system, demanding a thorough reassessment of current regulatory frameworks. This article analyzes the impact of climate risks (physical and transitional) on bank balance sheets and evaluates the feasibility of moving towards green macroprudential regulation. Using a mixed methodology that combines climate stress test scenario analysis (based on ECB and NGFS) and a panel data econometric model, it examines credit vulnerability to the tightening of climate policies. The results show that a disorderly transition would generate a short-term systemic shock due to the devaluation of stranded assets, while a climate inaction scenario would result in a critical and unabsorbable capital deterioration for banks. Furthermore, the econometric analysis empirically confirms that non-performing loans (LPLs) are dramatically amplified by strict climate policies, empirically validating the "horizon tragedy." Regarding regulatory policy, the study demonstrates that the Brown Penalty Factor (BPF) is substantially more effective than the Green Support Factor (GSF) in mitigating systemic risk, as it compels entities to internalize the cost of carbon-intensive exposures. It concludes that, despite the technical challenges related to standardizing taxonomic data, central banks should adopt differentiated capital requirements to safeguard global macro-financial resilience in the face of climate uncertainty.