The effects of climate change-related risks on banks: A literature review

This literature review describes the recent empirical literature in economics and finance focusing on how climate change-related risks affect banks, with a particular emphasis on microeconomic evidence. The comparison of empirical estimates shows that many studies project limited estimates of damages for banks. For both loan and bond spreads, most estimates of the effect of climate change are below 50 bp. In comparison, studies on stock markets document responses that are more substantial. In real estate markets, there is evidence of price effects notably for flood risks associated with sea level rise. However, some studies indicate that climate risks could be underestimated. We note challenges related to the measurement of adaptation potential, non-linear changes in hazards and responses, and the aggregation of effects across studies, markets, and bank portfolios.