The Impact of Climate Change on Financial Stability in South Africa

This study investigates the dynamic relationships between climate change and financial stability in South Africa by employing a Bayesian vector autoregression model (BVAR). Using data from 1991 to 2022, we examine the impact of carbon emissions, adjusted savings, renewable energy consumption, lending interest rates, and unemployment on financial stability. Our findings indicate that carbon emissions, adjusted savings damaged by carbon dioxide emissions, renewable energy consumption, and unemployment significantly erode financial stability. Impulse response functions reveal that shocks to carbon emissions, lending interest rates, and unemployment have lasting effects on financial stability. Forecast error variance decomposition analysis shows that external factors, particularly carbon emissions and lending interest rates, increasingly drive uncertainty in forecasting financial stability over time. The study’s results support the Financial Instability Hypothesis and the Diamond–Dybvig model, highlighting the importance of considering climate-related risks in financial stability analysis. The findings have significant implications for policymakers and financial regulators seeking to promote financial stability and mitigate climate-related risks in South Africa.