Extreme weather losses are reshaping financial risks
Extreme weather events are already affecting economies and financial systems. A new technical note by the Network for Greening the Financial System (NGFS) brings together 31 case studies from 28 economies between 2015 and 2025. It shows how floods, droughts, storms, cyclones and wildfires can reduce output, raise prices and put pressure on financial resilience. The report also shows that impacts differ widely by country, sector and hazard.
How do extreme events affect the economy?
Extreme weather events affect the economy through supply, demand and spillover channels. Floods can damage homes, factories, roads, bridges and farms. Drought can reduce crop yields and hydropower production. Heat can reduce labour supply and productivity. These shocks can interrupt production, transport, electricity supply and trade.
The report also shows demand effects. Households and firms may lose income, assets or confidence after an event. This can reduce consumption and investment. In some cases, reconstruction and public support can partly offset the shock. However, the overall impact depends on the scale of the event, the exposed assets and the resilience of the affected economy.
What are the financial channels?
The report explicitly links extreme weather events to financial risks. Banks can face higher credit risk when borrowers lose income or when collateral is damaged. Insurers can face higher claims after large events. Financial institutions can also face liquidity and operational risks, for example when clients need emergency cash, loan deferrals or payment support.
The case studies show that these effects were often local or temporary. But they can become more serious when losses are large, insurance coverage is low, or public finances are already under pressure. The report also notes possible spillovers through trade, reinsurance, financial markets and exchange rates.
Why does resilience matter?
The impact of extreme weather depends on more than the hazard itself. Insurance, fiscal space, adaptive infrastructure, public support and economic diversification can all reduce losses and support recovery. The report gives examples where insurance payouts and public-private schemes helped absorb part of the damage. It also shows that protection gaps remain, including in advanced economies.
The report concludes that better data and analysis are needed. Important gaps remain around hazards, exposures, losses, spillovers and second-round effects. For central banks, supervisors and other policymakers, this evidence can support assessments of price stability, financial stability and the resilience of the financial system.