IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v105y2025ics1057521925003916.html
   My bibliography  Save this article

Climate risks and financial stability: Evidence on the effectiveness of climate-related financial policies

Author

Listed:
  • D’Orazio, Paola

Abstract

This paper investigates the impact of climate-related risks on financial stability, focusing on the role of climate-related financial policies. Using a panel dataset of 88 countries from 2000 to 2020, the study examines how physical and transition risks, proxied by CO2 emissions, climate vulnerability indices, and the Global Climate Risk Index, affect key financial stability indicators, including the Bank Z-score, non-performing loans (NPL) ratio, and liquidity ratio. By incorporating the Climate-Related Financial Policy Index (CRFPI), the analysis contributes to the literature by quantifying the effectiveness of climate-related financial policies in mitigating financial risks. The findings reveal that climate risks increase financial instability. However, countries with stronger climate-related financial policies exhibit greater financial resilience, particularly through lower NPL ratios and improved liquidity conditions. Overall, the results suggest that while CRFPI mitigates financial instability, its impact on solvency risk is less pronounced. Moreover, the effectiveness of these policies shows diminishing returns at higher levels of regulatory intensity. These findings underscore the importance of integrating climate considerations into financial regulatory frameworks while ensuring a balanced approach to policy design.

Suggested Citation

  • D’Orazio, Paola, 2025. "Climate risks and financial stability: Evidence on the effectiveness of climate-related financial policies," International Review of Financial Analysis, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:finana:v:105:y:2025:i:c:s1057521925003916
    DOI: 10.1016/j.irfa.2025.104304
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057521925003916
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irfa.2025.104304?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:105:y:2025:i:c:s1057521925003916. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.