Accounting for climate transition risk in banks’ capital requirements
This paper uses a stylized simulation model to assess the potential impact of transition risk on banks’ balance sheets in a climate-stress-testing (i.e. short-run) framework. We show that moderate-tohigh transition risk increases overall bank losses only relatively modestly if the baseline is a stressed macroeconomic scenario. At the same time, even against a benign macroeconomic scenario, if highcarbon assets are at least 13% riskier than comparable assets a fire-sale mechanism could amplify an initially contained shock into a systemic crisis with significant losses for the EU banking sector. While showing that transition risks are concentrated, we find that an additional capital buffer of 0.9% RWA on average would be sufficient to protect the system.
ALESSI Lucia;
DI GIROLAMO Francesca;
PAGANO Andrea;
PETRACCO GIUDICI Marco;
2024-12-09
ELSEVIER SCIENCE INC
JRC137395
1572-3089 (online),
https://www.sciencedirect.com/science/article/pii/S1572308924000548,
https://publications.jrc.ec.europa.eu/repository/handle/JRC137395,
10.1016/j.jfs.2024.101269 (online),
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