Climate change and systemic risk: Evidence from financial intermediaries

Climate change represents an escalating global challenge with profound implications for sustainability. This paper investigates the impact of climate-induced temperature shocks on systemic risk within the banking sector. Using a sample of 35 financial intermediaries across 13 countries and employing the ∆CoVaR methodology, we find that deviations from historical temperature averages—particularly temperature increases—are associated with heightened systemic risk. By integrating climate variables into risk assessment models, we demonstrate that climate volatility threatens financial stability by amplifying credit risk and reducing lending capacity. Our findings contribute to the growing discourse on climate finance and provide valuable insights for policymakers, regulators, and institutional risk managers seeking to safeguard financial stability in the face of increasing climate variability. • Sustained temperature increases significantly elevate systemic risk in the European banking sector. • The effect of temperature deviations on systemic risk intensifies over longer historical horizons. • Need for climate-sensitive regulatory tools, including stress testing and portfolio rebalancing. • Climate risks threaten credit availability and the resilience of entrepreneurial ecosystems.