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Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2020 > (Research Paper) How Does Climate Change Interact with the Financial System? A Survey
December 24, 2020
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.
Asset Pricing, Banking, Insurance, Climate Change, Natural Disaster, Financial Stability
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.
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