Financial stability under climate stress: Empirical evidence from Namibia

Climate change has emerged as one of the defining risks in recent years. These risks are associated with economic losses and, eventually, the financial system's stability. This paper empirically examines the impact of climate change on financial stability in Namibia. This study employs a Nonlinear Autoregressive Distributed Lag (NARDL) approach to examine how climate change asymmetrically affects the stability of Namibia’s financial system, using quarterly data from 2009 to 2023. The findings reveal that fluctuations in temperature and rainfall have a detrimental asymmetric effect on financial stability. Interestingly, both increases and decreases in CO2 emissions are associated with improvements in financial stability. Therefore, the study recommends the integration of climate-related risks into financial institutions’ risk assessment frameworks and the adoption of long-term risk monitoring and mitigation strategies. Furthermore, the study also recommends that regulators should conduct climate stress testing to assess the resilience of the financial system stability under varying climate scenarios.