Module 3: Systemic Risks
The Financial System
The financial system is comprised of banks, insurance companies, stock exchanges along with the various financial instruments they use. They play a critical role in the economy by facilitating exchange of funds between various participants to enable activities such as saving and borrowing, investing, and risk sharing. By lending out savings to those who can make productive use of it, banks enable a substantial amount of economic activity that would not otherwise occur. Likewise, by managing risk, insurers provide a more stable environment for investment.
When issues or crises arise in the financial system, liquidity problems can occur that may result in a reduction of access to personal or corporate credit. That has an effect on the “real” economy, undermining consumer and corporate demand by, for example, decreasing debt-financed consumption and capital investment.
The climate crisis can impact the financial system through both physical and transition risks, but also from feedback loops that can amplify the effect of an initial shock, leading to economy-wide effects.