This chapter completes the discussion on fiscal–financial risks and looks at banks, shadow banks, central banks and international linkages.Banks have increased their resilience considerably over the past decade, supported by the international regulatory agenda. However, global indebtedness has increased further and bank balance sheets are often loaded with risky public and private credit. Moreover, there are fiscal risks from market-based finance: highly priced, low-quality credit held partly by a run-prone asset management industry, an under-funded pension industry and large derivative clearing houses. Central banks face risks from large asset holdings. International credit is very high and could transmit problems across borders. International safety nets have grown but so have demands for international support.Given record debt and debt increases, and our lack of knowledge and experience of how fiscal–financial risks will unfold in the future, building resilience is of the highest priority. This vindicates constraints on deficit and debt, such as the Maastricht limits and the regulatory agenda for the financial sector, and it provides a further argument for lean and efficient government.

Financial sector developments pose the second important fiscal risk for the coming years and decades and this is the first of two chapters mapping and analysing such fiscal–financial risks. Rising financing costs affect debt service expenditure, especially for countries with high debt and short-term financing. Asset price movements can constitute further major fiscal risks in a downturn. Adverse financial sector developments and negative confidence effects also burden public expenditure and finances via the real economy, and guarantees that fall due in ‘bad’ times can exacerbate this effect. Debt has ratcheted up over consecutive economic and financial cycles over the past forty years, an effect particularly strong during the global financial crisis due to fiscal–financial linkages. Simulations show that the situation of several advanced countries is critical, given their lack of fiscal buffers for another crisis.

The role of financial institutions in sustainable transitions has been conceptualised for a number of years. There is a growing recognition that traditional approaches are insufficient in the face of new levels of scale, likelihood and interconnectedness of environmental sources of risk. This chapter conducts a review of existing approaches to incorporating environmental sources of risk into mainstream financial risk frameworks. The review generated 14 illustrative case studies from submissions of G20 countries, financial institutions and private-sector stakeholders. The chapter makes several contributions to the research on sustainability transitions. First, it proposes a simple analytical framework for understanding environmental sources of financial risks. That helps financial actors understand and engage with environmental sources of risk. Second, it underlines the role of financial firms in sustainability transitions. Environmental risks must be priced correctly, so that sufficient capital is allocated. The progress of financial firms in incorporating environmental risk management into mainstream financial risk frameworks is summarised as are the challenges and solutions.