Financial Crime World

Banking Sector Vulnerabilities in Turkey Exposed to Climate Change Risks

Turkey’s unique geography, population density, and socioeconomic factors make it highly vulnerable to the impacts of climate change and environmental hazards. The World Bank’s Türkiye Country Climate and Development Report highlights the country’s exposure to rising temperatures, water stress, and food security concerns.

Climate Change Impacts on Turkey

  • Rising temperatures
  • Water stress
  • Food security concerns

As regional “green” initiatives like the European Union’s Green Deal push for a net zero future, Turkey’s financial sector is under pressure to adapt quickly. However, transitioning to decarbonization poses risks as changes in policy need to be carefully managed.

Turkish Banking Sector Vulnerabilities

  • The Turkish banking sector is particularly vulnerable to climate-related physical and transition risks.
  • Regulators and financial institutions must explore these implications and take action to strengthen the sector’s resilience.

Physical Risks to the Banking Sector

  • Climate-related physical risks can impact the economy and banking sector through various channels, including:
    • Reduced labor productivity due to heat stress
    • Drought affecting agricultural output
  • Turkish banks are exposed to significant physical risks given their geographically concentrated loan portfolios.
  • About 42% of all bank loans are focused in Istanbul, Tekirdag, and Kocaeli, which are at high risk of drought and earthquake.

Transition Risks

  • Transition risks could also be significant as Turkish banks lend to high-carbon-emitting sectors such as:
    • Energy
    • Manufacturing
    • Transport
    • Wholesale trade
    • Agriculture
  • The top five carbon-emitting sectors account for about 49% of total bank credit in Turkey, with the energy and agriculture sectors showing relatively high non-performing loan (NPL) ratios.

European Union’s Carbon Border Adjustment Mechanism (CBAM)

  • The CBAM, set to become effective from October this year, would impose higher tariffs on selected imported products based on their carbon footprint.
  • This could render Turkish export goods less competitive, particularly in the manufacturing, wholesale trade, and transportation sectors that are significant contributors to Turkey’s GDP.

Regulatory Action Needed

  • Regulators and supervisors must build internal capacity to integrate climate risk throughout the supervisory framework.
  • Key steps include:
    • Using event- or scenario-based climate stress tests to assess risks
    • Accounting for international finance and trade dimensions

Supporting a Shift towards Green Investments

  • Insights from risk assessments could guide the establishment of guidelines on integrating climate risk in risk management, governance, data and disclosure practices, and supervisory scoring models and approaches.
  • This would support a portfolio shift away from climate-risky assets towards green and resilient investments, stimulating change in the real economy.

The World Bank stands ready to support BRSA and other financial sector regulators in these efforts.