I show that shocks to financial intermediaries supplying hedging instruments to corporations have real effects. I exploit a quasi-natural experiment in South Korea in 2010, where regulations required banks to hold enough capital for taking foreign exchange derivatives (FXD) positions. Using variation in exposure to this regulation across banks, I find that the regulation caused a reduction in FXD supply, leading to a significant decline in exports for firms contracting derivatives with more exposed banks. Results indicate the crucial role of intermediaries in allocating risks through derivatives provision and establish a causal relationship between financial hedging and real economic outcomes.

We develop a market-based methodology to assess banks’ resilience to climate-related risks and study the climate-related risk exposure of large global banks. We introduce a new measure, CRISK, which is the expected capital shortfall of a bank in a climate stress scenario. To estimate CRISK, we construct climate risk factors and dynamically measure banks’ stock return sensitivity (that is, climate beta) to the climate risk factor. We validate the climate risk factor empirically and the climate beta estimates by using granular data on large US banks’ loan portfolios. The measure is useful in quantifying banks’ climate-related risk exposure through the market risk and the credit risk channels.

We propose a new approach to estimate banks’ credit exposures to transition risks that combines sectoral effects of climate policies from general equilibrium (GE) models with historical information on loans’ default risks. At worst, estimated exposures reach 14% of bank loan portfolio values. Accounting for historic loan payoff structures reduces exposures to 0.5%–2%. Exposures can increase by 3–5 percentage points due to aggregate economic shocks. Analyses surrounding climate transition events suggest our estimates can serve as an upper bound on banks’ transition risk exposures. Highlighting our measure’s novelty, emissions explain at most 60% of variation in banks’ exposures.