Accounting for climate transition risk in banks’ capital requirements
JRC Working Papers in Economics and Finance, 2022/8
This paper uses a stylized simulation model to assess the potential impact of transition risk on banks’ balance sheets and establishes a basis for calibrating relevant macro-prudential instruments. We show that even in the short run, a fire sale mechanism could amplify an initially contained shock on high carbon assets into a systemic crisis with significant losses for the EU banking sector. Under an orderly transition, the decrease in banks’ transition risk exposure due to the greening of the economy would reduce the effect of a fire-sale by a factor of 10.
ALESSI Lucia;
DI GIROLAMO Francesca;
PAGANO Andrea;
PETRACCO GIUDICI Marco;
2022-06-22
European Commission
JRC129221
https://publications.jrc.ec.europa.eu/repository/handle/JRC129221,
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