This paper shows that rising global temperature erodes financial stability. We combine macro-financial data covering more than 180 countries over 150 years with a time series approach based on natural climate variability. Our estimates imply that a permanent 1°C increase in global temperature increases the risk of a sovereign debt crisis by 20 p.p. and a banking crisis by 15 p.p. Sovereign debt rises by 55%, debt-to-GDP ratios increase by 22 p.p., and government expenditures soar due to the underlying economic losses. Crisis risk is concentrated in emerging economies. In contrast, a comparable analysis using local temperature shocks detects mostly negligible effects.
