Staff Reports
Climate Stress Testing
Number 977
September 2021

JEL classification: Q54, C53, G20

Authors: Hyeyoon Jung, Robert Engle, and Richard Berner

Climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment. We develop a stress testing procedure to test the resilience of financial institutions to climate-related risks. Specifically, we introduce a measure called CRISK, systemic climate risk, which is the expected capital shortfall of a financial institution in a climate stress scenario. We use the measure to study the climate-related risk exposure of large global banks in the collapse of fossil-fuel prices in 2020.

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AUTHOR DISCLOSURE STATEMENT(S)
This research was funded in part by a grant from the Inter-American Development Bank. The funding source did not have any input into the research process or the results.

Hyeyoon Jung declares that she has no relevant or material financial interests that relate to the research described in this paper.

Robert Engle declares that he has no relevant or material financial interests that relate to the research described in this paper.

Richard Berner declares that he has no relevant or material financial interests that relate to the research described in this paper.

Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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