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Euro-area physical risk indicators for climate-related financial stability analyses

Author

Listed:
  • Francesco Cusano

    (Bank of Italy)

  • Danilo Liberati

    (Bank of Italy)

  • Valentina Michelangeli

    (Bank of Italy)

  • Francesca Rinaldi

    (Bank of Italy)

Abstract

Climate-related physical risks can affect financial stability at a global level. Developing harmonized and comparable indicators is crucial for accurately assessing the potential risks that climate change-driven natural disasters pose to financial markets. These metrics evaluate the exposure of financial institutions' loans and securities portfolios covering a wide range of hazards, assuming different scenarios and incorporating various factors such as collateral, loans' maturity and flood defences. Exploiting the ECB physical risk indicators, this paper describes the key results for Italy as compared with the main euro-area countries. The results indicate that the risks to financial portfolios are expected to increase, especially under the pessimistic climate scenario, in Italy as well as in the rest of the euro area. The findings underscore the importance of adopting climate adaptation measures and incorporating climate risks into portfolio management, in order to reduce future losses and ensure the resilience of the financial system.

Suggested Citation

  • Francesco Cusano & Danilo Liberati & Valentina Michelangeli & Francesca Rinaldi, 2025. "Euro-area physical risk indicators for climate-related financial stability analyses," Questioni di Economia e Finanza (Occasional Papers) 949, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_949_25
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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