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Climate transition risk in the banking sector: what can prudential regulation do?

Author

Listed:
  • Grill, Michael
  • Popescu, Alexandra
  • Rancoita, Elena

Abstract

Climate-related transition risks are expected to escalate in the coming years, posing potentially significant threats to the banking system. This paper employs a DSGE model that incorporates heterogeneous firms and financial frictions to demonstrate the need to explicitly address climate-related risks in the prudential framework. Our findings indicate that failing to acknowledge transition risk can lead to excessive risk-taking by banks, thereby increasing the volatility of lending and output. With the introduction of climate-related prudential policies, banks are less exposed to transition risk and more efficient in allocating capital.

Suggested Citation

  • Grill, Michael & Popescu, Alexandra & Rancoita, Elena, 2026. "Climate transition risk in the banking sector: what can prudential regulation do?," Macroeconomic Dynamics, Cambridge University Press, vol. 30, pages 1-1, January.
    • Handle: RePEc:cup:macdyn:v:30:y:2026:i::p:-_23
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