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How Does Climate Change Interact with the Financial System? A Survey

December 24, 2020
Kakuho Furukawa*1
Hibiki Ichiue*2
Noriyuki Shiraki*3

Abstract

We survey the growing literature on the interaction between climate change, which is likely associated with a growing intensity and frequency of natural disasters, and the financial system. Assets, in particular real estate properties, do not adequately price in climate risks although disclosure and communication help alleviate the mispricing of assets. Further, natural disasters restrict the credit supply from affected banks even in areas not directly hit by the disaster; however, this negative impact is less severe for banks with more capital. Meanwhile, insurance provides some protection for the economy, firms, and households against the impact of natural disasters, but there are several challenges such as low coverage and moral hazard. Finally, our survey considers policy implications for financial authorities.

Keywords
Asset Pricing, Banking, Insurance, Climate Change, Natural Disaster, Financial Stability

JEL classification
G12, G21, G22, G41, Q54, R31

The authors thank the staff of the Bank of Japan, in particular Kenji Fujita, Wataru Hirata, Shun Kobayashi, Chihiro Morishima, Hitoshi Sasaki, Tadashi Shibakawa, Kohei Shintani, and Toshiaki Ogawa for their valuable help and comments. All remaining errors are our own. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

  1. *1Financial System and Bank Examination Department, Bank of Japan
    E-mail : kakuho.furukawa@boj.or.jp
  2. *2Financial System and Bank Examination Department (currently at the Naha Branch), Bank of Japan
    E-mail : hibiki.ichiue@boj.or.jp
  3. *3Financial System and Bank Examination Department, Bank of Japan
    E-mail : noriyuki.shiraki@boj.or.jp

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