Evaluating the Effect of Climate Risk on Financial Fragility in Arab Countries

This study explores the impact of climate risk on the financial fragility in Arab countries, which is partitioned into four categories pursuant to the level of income from 2007 to 2019. This has been performed using an aggregate banking stability index, as a measure of financial fragility in 18 countries, including (i.e. Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Sudan, Tunisia, UAE, Yemen). The outcomes reveal that climate risk has significant positive effects on financial fragility. The findings show that importance of climate-related risk and some factors in explaining financial fragility, where broad money, domestic credit to private sector by banks, GDP growth, and income seem to have significant effects on financial fragility. Robustness test using alternative measures of financial fragility and changing estimation method to assure the reliance of study results. Both approaches confirm the previous findings. The study contributes to the literature by providing empirical evidence on the effect of climate-related risk on banking stability in Arab countries over 13 years and emphasizing that climate risk is source of risk for the financial system. The research insights of this contribution can inform policymakers and central banks to assess climate-related financial risks, highlighting the need for a better understanding of the impact of climate shocks on world financial system across countries.