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

Author

Listed:
  • Michael Grill

    (ECB - European Central Bank - European Central Bank)

  • Alexandra Popescu

    (LéP [Poitiers] - Laboratoire d'économie de Poitiers [UR 13822] - UP - Université de Poitiers = University of Poitiers)

  • Elena Rancoita

    (ECB - European Central Bank - European Central Bank)

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

  • Michael Grill & Alexandra Popescu & Elena Rancoita, 2026. "Climate transition risk in the banking sector: what can prudential regulation do?," Post-Print hal-05635098, HAL.
    • Handle: RePEc:hal:journl:hal-05635098
    DOI: 10.1017/S1365100526100947
    as

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