We study the relationship between climate change and financial systemic risk. First, we test whether, to what extent and how quickly the systemic risk of US banking and insurance sectors reacts to billion-dollar weather and climate disasters. We prove that some extreme events can exacerbate financial systemic risk and provide insights about the different timing at which the reaction of the systemic risk measures takes place. Second, we investigate through quantile regressions how the performance of green and brown market indexes affects the systemic risk of the two US financial sectors. We observe that higher levels of the green indexes reduce systemic risk more than a raise in brown indexes, with an increasing magnitude in tail conditions. A raise in the riskiness of the green indexes seems to significantly increase systemic risk, with the effect being stronger than that of an increase in the riskiness of brown indexes. Our results confirm the importance of the adoption of appropriate policies aiming at contrasting the raise in the frequency and severity of climate disasters. Our findings are also important in the perspective of the likely increase (decrease) in the exposure of financial firms towards green (brown) companies, induced by the policy decisions taken to combat climate change, and in terms of the implications for banks’ and insurers’ risk management models and procedures.

By analyzing a sample of US and European listed banks over the years 2015–2022, we investigate the relationship between greenwashing behavior and systemic risk. We use a measure of greenwashing that considers the consistency of what banks disclose with what they actually do to address ESG-related issues. We find that engaging in greenwashing practices contributes to undermining financial stability, with a rise in systemic risk which is exacerbated for less efficient and larger banks. Market seems to acknowledge a superior informative value to banks’ actual ESG performance, giving less importance to what they disclose. Finally, a better performance in each of the environmental, social and governance dimensions reduces systemic risk, but only a bank’s commitment in addressing environment-related issues seems to moderate the contribution of greenwashing to financial system fragility.

This paper contributes to prior literature and to the current debate concerning recent revisions of the regulatory approach to measuring bank exposure to interest rate risk in the banking book by focusing on assessment of the appropriate amount of capital banks should set aside against this specific risk. We first discuss how banks might develop internal measurement systems to model changes in interest rates and measure their exposure to interest rate risk that are more refined and effective than are regulatory methodologies. We then develop a backtesting framework to test the consistency of methodology results with actual bank risk exposure. Using a representative sample of Italian banks between 2006 and 2013, our empirical analysis supports the need to improve the standardized shock currently enforced by the Basel Committee on Banking Supervision. It also provides useful insights for properly measuring the amount of capital to cover interest rate risk that is sufficient to ensure both financial system functioning and banking stability.