A macroprudential approach to compound climate risks

Hiebert, Paul and Monnin, Pierre (2025) A macroprudential approach to compound climate risks. . London School of Economics and Political Science. Centre for Economic Transition Expertise, London, UK.

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Abstract

Climate change is often characterised as a standalone risk for the financial system. In practice, however, the emergence and materialisation of climate-related shocks interact with general macro-financial conditions, implying potentially novel and difficult-to-predict interactions. In such an environment, macroprudential buffers earmarked for specific risks have limitations, as they might not account for important correlations between climate-related shocks and other sources of financial vulnerability, nor for the extent to which climate-related shocks might compound existing challenges in the real economy and financial sector. In light of such complex challenges, this report investigates how a holistic approach can enhance the financial system’s ability to absorb compound shocks. It finds that consolidated capital buffers accounting for the amplifying effects of combined shocks, which single-risk buffers might underestimate, offer general insurance against several sources of uncertainty (both reducible and irreducible).

Item Type:	Monograph (Report)
Official URL:	https://cetex.org/publications/
Additional Information:	© 2025 The Author(s)
Divisions:	Grantham Research Institute
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance K Law > K Law (General)
Date Deposited:	22 Dec 2025 16:00
Last Modified:	22 Dec 2025 16:00
URI:	http://eprints.lse.ac.uk/id/eprint/130740

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