From Extreme Events to Extreme Seasons: Financial Stability Risks of Climate Change in Mexico

By Michaela Dolk, Dimitrios Laliotis, Sujan Lamichhane

August 25, 2023

Preview Citation

Format: Chicago

Michaela Dolk, Dimitrios Laliotis, and Sujan Lamichhane. From Extreme Events to Extreme Seasons: Financial Stability Risks of Climate Change in Mexico, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper explores the financial stability implications of acute physical climate change risks using a novel approach that focuses on a severe season associated with a sequence of tropical cyclone and flood events. Our approach was recently applied to study physical risks in the Mexican financial sector, but the framework is applicable to other countries as well. We show that even if the scale of individual climate events may not be material at an aggregate national scale, considering a sequence of events could lead to potentially significant macro-financial impacts in the short term. This could occur even if none of the individual events affect the particular region(s) with highest concentrations of banking sector exposures. Our results indicate potential for even greater effects in the future given the increasing severity and frequency of extreme events from climate change. Thus, this paper highlights the importance of considering sequences of extreme physical risk events driven by climate change, rather than just individual extreme events, to better understand financial stability implications and design effective policies.

Subject: Climate change, Economic sectors, Environment, Financial institutions, Financial Sector, Natural disasters, Stocks

Keywords: Climate change, Climate change condition, Climate change risk, Damage estimate, Disasters, Extreme seasons, Financial sector, Financial stability, Global, IMF working paper No. 23/176, Natural disasters, Physical risk, Risk event, Stocks, Stress testing

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/176
Stock No:

WPIEA2023176
ISBN:

9798400249679
ISSN:

1018-5941

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