Florian Bartsch
- 27 May 2024
- WORKING PAPER SERIES - No. 2943Details
- Abstract
- Amid the growing financial vulnerabilities posed by climate change, we investigate macroprudential capital buffers to mitigate systemic risks and increase the resilience of the banking sector. Leveraging granular data and state-of-the-art stress testing methods, we quantify potential bank losses attributed to climate-related transition risks. Focusing on short-term transition scenarios, we document a significant variance among banks in their risk exposure, with the most exposed institutions being those characterized by lower excess capital. Subsequently, we introduce a methodological framework for tailoring bank-specific buffer requirements to cover these losses, offering macroprudential authorities a practical method for calibrating climate-related macroprudential capital buffers, complementing microprudential policies. While we focus our application on transition risks, the framework can be extended to capture all climate risks in general. The study demonstrates the potential of macroprudential capital buffers to mitigate potential climate-related losses and contributes to the understanding of the appropriate prudential policy response to these challenges.
- JEL Code
- E61 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Policy Objectives, Policy Designs and Consistency, Policy Coordination
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
- 16 November 2022
- FINANCIAL STABILITY REVIEW - BOXFinancial Stability Review Issue 2, 2022Details
- Abstract
- This box investigates the measurement of banks’ exposures to concentration risk related to climate change. It does so by introducing a new metric to quantify carbon-related concentration risk in banks’ corporate loan portfolios. Using data on individual borrowers’ emissions, the formula of the Herfindahl-Hirschman Index (HHI) is extended to create a carbon-weighted HHI (cwHHI). The cwHHI reveals substantial heterogeneity in the degree of carbon-related concentration among portfolios similarly exposed to high-emitting firms. Furthermore, banks with exposures to high-emitting firms similar to their peers but with higher cwHHI experience higher expected losses in a disorderly transition scenario. The empirical findings of this box suggest that institutions and exposures significantly affected by carbon-related concentration risk run a higher risk of incurring losses, extending even to those banks with a lower share of exposures to high emitters. The implication is that carbon-related concentration risk may be a material risk driver.
- JEL Code
- G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming