Higher climate risk weakens EU banking stability

What the study found: Higher climate change risk was associated with weaker banking-system stability in European Union countries. The study also found that renewable energy consumption and energy-related taxes reduced this adverse relationship.

Why the authors say this matters: The authors conclude that adding environmental governance mechanisms to climate-finance analysis helps explain financial stability. They also suggest that sustainable energy transitions and environmental tax policy may strengthen the resilience of European banking systems.

What the researchers tested: The researchers analyzed panel data from 27 European Union countries between 2012 and 2022. They used fixed-effects ordinary least squares (OLS), two-stage least squares (2SLS), and robust generalized method of moments (GMM) estimations to examine climate risk, banking-system stability, renewable energy consumption, and energy taxes.

What worked and what didn't: Across the different estimation strategies, higher climate risk consistently reduced banking-system stability. Renewable energy consumption and energy taxes both mitigated this negative effect, although the stabilizing influence of renewable energy showed diminishing returns at higher deployment levels, and the energy-tax effect was stronger in countries with higher fiscal stringency.

What to keep in mind: The summary does not describe specific country-level exceptions or other limitations beyond the scope of the data and methods used. The findings are based on 27 EU countries over 2012 to 2022 and on the outcome measures and identification strategies reported in the abstract.

Key points

• Higher climate change risk was linked to lower banking-system stability in EU countries.
• Renewable energy consumption reduced the negative effect of climate risk on banking stability.
• Energy taxes also weakened the adverse climate-risk relationship.
• The renewable-energy effect showed diminishing returns at higher deployment levels.
• The energy-tax effect was stronger where fiscal stringency was higher.