Bank Stress Testing of Physical Risks Under Climate Change Macro Scenarios: Typhoon Risks to the Philippines

49 Pages Posted: 7 Sep 2022

See all articles by S. Hallegatte

S. Hallegatte

World Bank

Fabian Lipinsky

International Monetary Fund (IMF)

Paola Morales

International Monetary Fund (IMF)

Hiroko Oura

International Monetary Fund (IMF)

Nicola Ranger

World Bank

Martijn Gert Jan Regelink

World Bank

Henk Jan Reinders

World Bank

Date Written: August 1, 2022

Abstract

Bank stress tests of climate change risks are relatively new, but are rapidly proliferating. The IMF and World Bank staff collaborated to develop an experimental macro scenario stress testing approach to examine physical risks for banks by building a dynamic stochastic general equilibrium model linked to global climate and a catastrophe risk model specifically for the Philippines. Our model shows that the impact of extremely rare typhoons on GDP could already be systemic and worsen substantially with climate change. However, bank capital declines only modestly unless the event is compounded with other disasters, partly thanks to the strength of Philippines’ banks and economy before the COVID crisis. However, more work is needed before drawing strong conclusions about the relevance of climate risk, as the model focused only on typhoons’ physical capital destructions and their macroeconomic-level transmissions to banks.

Keywords: Climate change, bank, stress test, financial stability, CAT model, disasters, bank stress testing, bank stress tests, climate change macro scenario, annex I. macro scenario model, climate change stress test, Natural disasters, Stress testing, Financial sector stability, Global, climate scenario, climate model, physical capital, simulation result

JEL Classification: E13, G01, G21, O53, Q54, G28, G18

Suggested Citation

Hallegatte, Stephane and Lipinsky, Fabian and Morales, Paola and Oura, Hiroko and Ranger, Nicola and Gert Jan Regelink, Martijn and Reinders, Henk Jan, Bank Stress Testing of Physical Risks Under Climate Change Macro Scenarios: Typhoon Risks to the Philippines (August 1, 2022). IMF Working Paper No. 2022/163, Available at SSRN: https://ssrn.com/abstract=4210160

Stephane Hallegatte (Contact Author)

World Bank ( email )

1818 H Street NW
Washington, DC 20433
United States

Fabian Lipinsky

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Paola Morales

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Hiroko Oura

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Nicola Ranger

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Martijn Gert Jan Regelink

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Henk Jan Reinders

World Bank

1818 H Street, NW
Washington, DC 20433
United States

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