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, ultimately, the stability of the financial system. This study examines the impact of climate change on financial stability in Namibia using quarterly data spanning from the period 2009 to 2023. The Nonlinear Autoregressive Distributed Lag (NARDL) approach is employed to assess how climate change asymmetrically affects the stability of Namibia’s financial system. The findings reveal that both increases and decreases in rainfall, as well as higher temperatures, exert negative long-term asymmetric effects on financial stability, while rises in CO2 emissions appear to enhance it. Accordingly, this study recommends the integration of climate-related risks into financial institutions’ risk assessment frameworks, together with the adoption of long-term monitoring and mitigation strategies. Finally, regulators are also encouraged to conduct climate stress tests to assess the resilience of the financial system under varying climate scenarios.