Tuesday, July 15, 2025

Climate disasters are weakening the banking sector

A new study reveals how climate disasters are shaking the global economy and weakening the banking sector, requiring ‘a more forward-thinking policy adapted to new climate risks’

By examining economic and climate data, a team of economists including Professor Rong Ding at NEOMA Business School show that climate events increase the risk of loan defaults and put financial markets under strain, exposing banks to unprecedented challenges.

The more a bank is exposed to borrowers affected by disasters, the greater the risk of non-repayment, destabilising the entire sector.

Professor Ding and his co-authors focused on examining interstate syndicated loans, where multiple states join together to borrow large sums. They find this mechanism can amplify crises and trigger a domino effect with systemic repercussions if disasters are poorly anticipated.

By combining indicators of damage caused by climate disasters (death toll, financial losses, etc.) with tools assessing the risk of banking defaults, the researchers were able to quantify precisely the effects of climate hazards on the solvency of financial institutions.

Their goal is to develop a climate risk exposure index to identify the most vulnerable regions and anticipate banks’ difficulties in recovering loans in these areas.

Turning indicators red

The results are unequivocal: when climate risk exposure increases by one standard deviation (a statistically significant unit of measure), all indicators turn red for creditor institutions.

The researchers highlight a rise in the expected shortfall – the average loss a bank can expect in worst-case scenarios – of 14.7% in the short term and 1.3% in the long term. The value at risk, the maximum probable loss, increases similarly, as does the likelihood of financial system destabilisation (systemic risk contribution).

Therefore, they warn the statistical correlation between climate disasters, unpaid loans, and economic destabilisation is a cause for concern.

When a disaster strikes borrowers, the researchers suggest banks could improve their resilience by temporarily reducing lending activity and setting aside cash reserves to offset future losses. This creates a financial cushion that helps to absorb the consequences of climate disasters.

“The future requires a more forward-thinking policy adapted to new climate risks. The systematic integration of a climate risk exposure index into financial institutions’ assessments could be a significant strategic lever,” says Professor Ding. 

The study was published in The European Journal of Finance.

Latest

i-invest announces media partnership with GITEX GLOBAL 2025

i-invest is proud to be a media partner of...

Tech must-reads for the modern business leader

As technological change continues to influence the world of...

Silver linings: How to change the midlife career narrative

Midlife job-seeking is often subject to ageism and disheartening...

Leading IoT identity security platform launches latest AI-supported automation

The latest iteration of KeyScaler from Device Authority simplifies...

Subscribe To Our Content

Don't miss

i-invest announces media partnership with GITEX GLOBAL 2025

i-invest is proud to be a media partner of...

Tech must-reads for the modern business leader

As technological change continues to influence the world of...

Silver linings: How to change the midlife career narrative

Midlife job-seeking is often subject to ageism and disheartening...

Leading IoT identity security platform launches latest AI-supported automation

The latest iteration of KeyScaler from Device Authority simplifies...

Ark and Nebius collaborate to drive UK expansion of AI infrastructure

High-density facility supports Nebius’s deployment of thousands of NVIDIA...

i-invest announces media partnership with GITEX GLOBAL 2025

i-invest is proud to be a media partner of GITEX GLOBAL 2025, the world’s largest tech, AI, and startup show, which takes place at...

Tech must-reads for the modern business leader

As technological change continues to influence the world of business in ever more pronounced ways, gaining insight from within industry and academia has never...

Silver linings: How to change the midlife career narrative

Midlife job-seeking is often subject to ageism and disheartening rejections from automated application tracking systems – unless you change your narrative, says coach and...

LEAVE A REPLY

Please enter your comment!
Please enter your name here