Abstract
The escalating impact of climate change on financial systems signals an urgent
need to enhance risk management within the banking sector. Addressing this challenge is
particularly critical for South Africa, where climate-induced systemic risks are increasingly
evident.
Aim: This study investigates the role of climate change in driving systemic risk within South
Africa’s banking sector, focussing on asset volatility as a mediating factor.
Setting: Quarterly data for South Africa from 2002 to 2020 were used in this study.
Method: The study utilises Bayesian Model Averaging and Structural Equation Modelling
along with the Baron and Kenny mediation approach.
Results: The findings reveal a positive relationship between climate change and bank systemic
risk, with asset volatility acting as a partial mediator suggesting that climate-induced risk
elevates bank systemic risk in South Africa
Conclusion: The study underscores the need for cohesive risk management strategies that
integrate both macro-prudential regulatory perspectives and micro-risk management practices
to mitigate climate-induced systemic risks.
Contribution: This study contributes to the understanding of the impact of climate change on
systemic risk in South Africa’s financial system by using the component expected shortfall
method to quantify risk. By using asset volatility as a mediator and the ND-GAIN Climate
Vulnerability Index, the study offers a nuanced, multidimensional view of how climate risks
affect financial stability.