Central banks and climate-related financial risks.

Abstract

In the last few years, academic literature and reports from different institutions have labelled climate-related risks as a source of financial instability. In this context, the central banks play a crucial role in raising awareness of climate-related risks and helping financial institutions integrate climate change considerations within their decision-making processes. This thesis will first study climate-related risks, exploring the potential sources, drivers and transmission channels that give rise to and amplify such risks. Subsequently, we will further explore physical and transition risks in terms of how they threaten financial stability and, consequently, what is the role played by central banks and their range of prudential and monetary instruments and policies. The second half of the thesis will focus on Climate Stress Tests, with the objective of understanding how these exercises work and their contribution to accelerating the integration of climate-related risks into the financial sector. We will explore several aspects of these first pilot exercises, such as their objectives and the approach and structure adopted. We will then dedicate the last chapter to identifying the impact of Climate Stress Tests by reviewing increasingly specific and focused sources, starting with international organisation's reports, then focusing on the ECB's Climate Risk Stress Test, and finally concluding with the case of BPER Banca, an Italian bank that participated in the latter. The resulting scenario emphasize how the ECB gave a fundamental push to integrating climate-related risks, highlighting how central banks can be crucial in tackling such risks by deploying instruments, such as Climate Stress Tests.