Climate Stress Testing
78 Pages Posted: 28 Sep 2021 Last revised: 24 Jun 2022
Date Written: September 1, 2021
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: Suggested Citation