Climate Change and Banking System Resilience in Kazakhstan and the Kyrgyz Republic
In recent decades, climate change has emerged as a significant macroprudential challenge for financial systems, particularly in developing countries that rely heavily on natural resources. Climate shocks have been defined as encompassing both direct physical risks (floods, droughts, and extreme weather events) and transition risks associated with increased regulation, technological shifts, and changes in economic structure. These processes have the potential to not only compromise the quality of banks’ loan portfolios but also to heighten their operational vulnerability. The climate shocks are increasingly turning into financial shocks that can undermine the resilience of banking systems. The study by Satpayeva et al. shows that, for Central Asian countries such as Kazakhstan and the Kyrgyz Republic, this is no longer an abstract threat but a practical challenge for the coming years.
Stress Tests
On the basis of the integrated methodological approach, the combined effect of climate risks on the resilience of banking systems in Kazakhstan and the Kyrgyz Republic is examined. It combines stress testing based on consolidated banking balance sheets, VAR modeling, and an adapted CPAT tool to forecast macroeconomic and financial dynamics under different physical and transition risk scenarios.
The banking systems exhibit opposite responses to short-term stressors. Kazakhstan’s system shows improvement in indicators under stress conditions, which may evidence potential “cleansing” or restructuring effects. Conversely, the Kyrgyz Republic’s banking system demonstrates a classical stress reaction with a sharp deterioration of capital indicators.
Modeling results reveal counterintuitive effects of long-term climate impacts on banking stability. Depending on the economic structure, there are different channels of vulnerability. Kazakhstan is a major exporter of oil and metals. Therefore, Kazakhstan’s banks are particularly sensitive to transition risks. A decline in global demand for hydrocarbons or a tightening of carbon policies could lead to a surge in non-performing loans, particularly in the oil and gas sector. The Kyrgyz Republic lacks such resources, but its economy is heavily dependent on migrant remittances (up to 25-30% of GDP). Its main threats are physical risks (natural disasters) and external shocks. Floods and droughts are already directly affecting agriculture and borrowers’ assets; a decrease in remittance inflows immediately creates foreign exchange pressure, accelerates imported inflation, and affects bank liquidity. Both countries exhibit a “climate paradox,” in which long-term physical climate risks lead to improvements in banking system financial indicators. This phenomenon may be explained by structural effects, in which long-term climate change stimulates fundamental economic restructuring, leading to more efficient resource allocation.
Key Lessons
- Climate is a financial risk, not just an environmental issue. It needs to be integrated into banking supervision and stress tests.
- There are no one-size-fits-all solutions. The Kyrgyz Republic prioritizes protecting itself from remittance shocks and foreign exchange risks, while Kazakhstan prioritizes protecting itself from the carbon transition and stranded assets.
- Early warning is cheaper than a crisis. Climate “tipping point” indicators should be incorporated into macroprudential policy.
- Green finance is not a fad, but a resilience tool. It reduces risks for both banks and the economy as a whole.
Course for Sustainability
First, regulators need to integrate climate considerations into financial supervision as quickly as possible. Central banks should incorporate climate scenarios into stress tests and introduce early warning indicators. Second, additional buffers will be needed to address specific vulnerabilities. In Kazakhstan, regulators should limit excessive lending concentrations in carbon-intensive sectors and require banks to hold significant capital reserves in the event of a collapse in commodity prices. In the Kyrgyz Republic, capital and liquidity reserves are essential to address a sharp decline in remittances. Third, green finance should be stimulated. Kazakhstan should leverage the capabilities of the Astana International Financial Center to issue green bonds and attract capital for sustainable projects. The Kyrgyz Republic should develop national green lending and certification standards adapted to the market scale.
Finally, climate change poses a dual challenge for the banking systems of both countries. They will need to cope with both natural disasters and the green transformation of their economies. Stress tests have already identified weaknesses. Now it is needed to strengthen banking resilience where it’s weakest and redirect funding to projects that increase economic resilience to climate shocks. Then, banks in Kazakhstan and the Kyrgyz Republic will not only withstand climate change but also promote green development.
About Authors
Zaira Satpayeva, PhD, associate professor, leading researcher at the Institute of Economics of the Committee of Science of the Ministry of Science and Higher Education of the Republic of Kazakhstan (Kazakhstan). Her research interests include sustainable development, science, innovation, digitalization, regional economics, and gender economics.
Nurgul Akimova, M.Sc., Director at the “Global Sciences” LLC (the Kyrgyz Republic). Her research interests include sustainable development, finance, innovation, and digitalization.
Dana Kangalakova, PhD, associate professor, leading researcher at the Institute of Economics of the Committee of Science of the Ministry of Science and Higher Education of the Republic of Kazakhstan (Kazakhstan). Her research interests include sustainable development, science, human capital, intellectual potential, and gender economics.