A Finance Approach to Climate Stress Testing

51 Pages Posted: 6 May 2020

See all articles by Henk Jan Reinders

Henk Jan Reinders

Rotterdam School of Management; Dutch Central Bank (DNB)

Dirk Schoenmaker

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM); Centre for Economic Policy Research (CEPR)

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Multiple version iconThere are 2 versions of this paper

Date Written: April 10, 2020

Abstract

There is increasing interest in assessing the impact of climate policies on the value of financial sector assets, and consequently on financial stability. Prior studies either take a “black box” macro-modelling approach to climate stress testing or focus solely on equity instruments – though banks’ exposures predominantly consist of debt. We take a more tractable finance (valuation) approach at the industry-level and use a Merton contingent claims model to assess the impact of a carbon tax shock on the market value of corporate debt and residential mortgages. We calibrate the model using detailed, proprietary exposure data for the Dutch banking sector. For a €100 to €200 per tonne carbon tax we find a substantial decline in the market value of banks’ assets equivalent to 4-63% of core capital, depending on policy choices.

Keywords: Climate stress test, contingent claims analysis, climate policies, carbon tax, banks

JEL Classification: G13, G21, H23, Q54

Suggested Citation

Reinders, Henk Jan and Schoenmaker, Dirk and Van Dijk, Mathijs A., A Finance Approach to Climate Stress Testing (April 10, 2020). Available at SSRN: https://ssrn.com/abstract=3573107 or http://dx.doi.org/10.2139/ssrn.3573107

Henk Jan Reinders

Rotterdam School of Management ( email )

Dutch Central Bank (DNB) ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

Dirk Schoenmaker (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam
Netherlands

HOME PAGE: http://www.rsm.nl/people/dirk-schoenmaker/

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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