Climate Stress Testing

78 Pages Posted: 28 Sep 2021 Last revised: 19 Jul 2022

See all articles by Hyeyoon Jung

Hyeyoon Jung

Federal Reserve Bank of New York

Robert F. Engle

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); New York University (NYU) - Volatility and Risk Institute

Richard Berner

Leonard N. Stern School of Business, NYU

Date Written: September 1, 2021

Abstract

Climate change could impose systemic risks upon the financial sector, either via disruptions in economic activities resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment. We develop a stress testing procedure to test the resilience of financial institutions to climate-related risks. Specifically, we introduce a measure called CRISK, systemic climate risk, which is the expected capital shortfall of a financial institution in a climate stress scenario. We use the measure to study the climate-related risk exposure of large global banks in the collapse of fossil-fuel prices in 2020.

Keywords: climate risk, financial stability, stress testing

JEL Classification: Q54, C53, G20

Suggested Citation

Jung, Hyeyoon and Engle, Robert F. and Berner, Richard, Climate Stress Testing (September 1, 2021). FRB of New York Staff Report No. 977, Rev. June 2022, Available at SSRN: https://ssrn.com/abstract=3931516 or http://dx.doi.org/10.2139/ssrn.3931516

Hyeyoon Jung (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Robert F. Engle

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Richard Berner

Leonard N. Stern School of Business, NYU ( email )

44 West 4th St
New York, NY 10012
United States

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