Impact of Climate Change on Financial Stability of Banking Sector in Pakistan

Abstract

The study underscores the critical role of climate change as a growing risk to the financial stability of the banking sector in Pakistan. Empirical findings reveal a significant negative impact of climate change, evidenced by rising temperatures and CO2 emissions, on financial stability metrics such as ROA, ROE, and Z-score. These results highlight the urgent need for green financial instruments and government collaboration to mitigate such risks. Climate change is an active research topic given its economic, social and environmental repercussions. However, this research is fundamentally conducted to empirically analyse the impact of climate change on the financial stability of banking sector. GMM technique has been applied to test the proposed hypothesis. Findings, of the study reveals that climate change negatively impact the financial stability of the Banks. Climate change-induced natural disasters transfer losses to the financial sector in various ways. These include direct damage to banking and payment service facilities, heightened uncertainty for investors, limited availability of finance for reconstruction efforts following physical damage and decline in asset prices.