Do climate risks contribute to financial system stress? The case of ASEAN-5 countries

Purpose This study aims to investigate the impact of climate change on financial system stress in ASEAN-5 countries: Indonesia, Malaysia, the Philippines, Singapore and Thailand. Design/methodology/approach The authors construct a Financial Stress Index (FSI) from multiple financial indicators and assess physical climate risks using six indicators grouped into weather- and disaster-related proxies. Using first-difference generalised methods of moments estimation, this study analyses the dynamic relationships between these variables from the first quarter of 2008 to the first quarter of 2017. Findings The findings reveal significant positive relationships between disaster-related variables and the FSI, indicating that extreme climate events exacerbate financial system stress. While weather-related factors show no direct correlation with the FSI, they act as precursors to climate-related disasters, indirectly contributing to financial stress. Specifically, interbank lending rates exhibit the most pronounced associations with physical risk variables. Practical implications This study emphasises the urgent need for policymakers to address the multi-faceted impact of climate change on financial stability. This includes enhancing physical resilience and implementing macroprudential policies to safeguard the financial system from climate risks. Social implications Understanding the broader impact of climate change on financial stress can help societies prepare for and mitigate the adverse effects of extreme climate events on economic stability, promoting more resilient and sustainable economies and communities. Originality/value To the best of the authors’ knowledge, this study is the first comprehensive analysis examining the role of climate change risk on financial system stress in developing economies, specifically focusing on ASEAN-5 countries.