Financial network valuation under climate transition risk

Abstract

This paper uses a general network valuation model to consider financial contagion under climate transition risk. The generality of the network valuation model comes from the ability to include different valuation frameworks and contagion channels. We illustrate this model using a case study of developing nations in southern, eastern, and southeastern Asia. Using the Network for Greening the Financial System transition scenarios, we find the highest total losses for financial firms in larger economies. However, on average, financial firms in smaller economies are more vulnerable and incur higher losses showing the spillover effects between large and small economies. We then conduct a sensitivity analysis to examine losses to financial firms under different network densities. We find the size and range of losses are highest in sparse networks. These sensitivity results show the extent of uncertainty to financial firms from the network and transition scenario.

Keywords: Financial networks, climate risk, transition scenarios, financial contagion