U.S. Banks’ Exposures to Climate Transition Risks

70 Pages Posted: 6 Apr 2023

See all articles by Hyeyoon Jung

Hyeyoon Jung

Federal Reserve Bank of New York

João A. C. Santos

Federal Reserve Bank of New York; Nova School of Business and Economics

Lee Seltzer

Federal Reserve Bank of New York

Date Written: April 2023

Abstract

We build on the estimated sectoral effects of climate transition policies from the general equilibrium models of Jorgenson et al. (2018), Goulder and Hafstead (2018), and NGFS (2022a) to investigate U.S. banks’ exposures to transition risks. Our results show that while banks’ exposures are meaningful, they are manageable. Exposures vary by model and policy scenario with the largest estimates coming from the NGFS (2022a) disorderly transition scenario, where the average bank exposure reaches 9 percent as of 2022. Banks’ exposures increase with the stringency of a carbon tax policy but tend to benefit from a corporate or capital tax cut redistribution policy relative to a lump sum dividend. Also, banks’ exposures increase, although not dramatically in stress scenarios. For example, according to Jorgenson et al. (2018), banks’ exposures range from 0.5—3.5 percent as of 2022. Assuming that loans to industries in the top two deciles most affected by the transition policy lose their entire value, banks’ exposures would increase to 12—14 percent. Finally, there is a downward trend in banks’ exposures to the riskiest industries, which appears to be at least in part due to banks gradually reducing funding to these industries.

Keywords: banks’ climate risk exposures, climate transition risks, NGFS scenarios

JEL Classification: G21, H23, Q54

Suggested Citation

Jung, Hyeyoon and Santos, João A. C. and Seltzer, Lee, U.S. Banks’ Exposures to Climate Transition Risks (April 2023). FRB of New York Staff Report No. 1058, Available at SSRN: https://ssrn.com/abstract=4411661 or http://dx.doi.org/10.2139/ssrn.4411661

Hyeyoon Jung (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: http://HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Lee Seltzer

Federal Reserve Bank of New York ( email )

New York, NY
United States

HOME PAGE: http://https://sites.google.com/view/leeseltzer

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