Climate change and financial sector risks

Consider the following dialogue between Sean, an economics student, and Yvette, a teaching assistant in his class.

YVETTE: I hope you paid attention to the material on the financial sector risks arising from climate change. Specifically, there are three kinds of risk: the transitional risk, the physical risk ... Please name the third risk.

SEAN: The third risk faced by the banking sector is the (liability, global, local, default)

YVETTE: Could you please elaborate on the sources of this type of risk? SEAN: The main source of this risk is (the losses of the insurance companies selling liability insurance to firms sued for environmental damages).

YVETTE: The United Nations report indicates that it is more difficult for (newer, older) central bankers to include climate change in conducting monetary policy.

Could you please name a few actions central banks can take in response to climate change? Check all that apply.

a. Denying liability insurance to households suing oil and natural gas producers

b. Differentiating reserve and capital requirements for "green assets" of banks

c. Subsidizing legal expenses due to environmental damages lawsuits

d. Requiring banks to limit credit extensions to carbon-intensive borrowers