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Climate Stress Testing

Climate Stress Testing Hyeyoon Jung | Robert Engle | Richard Berner N O . 977 S E P T E M B E R 2021 Climate Stress Testing Hyeyoon Jung, Robert Engle, and Richard Berner Federal Reserve Bank of New York Staff Reports, no. 977 September 2021 JEL classification: Q54, C53, G20 Abstract 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 return on an S&P 500 ETF for the market return. The stock return and accounting data of banks are from Datastream, and syndicated loan data is from LPC DealScan and Bloomberg League Table. We use the DealScan-Compustat link fromSchwert (2018). 3 Methodology and Empirical Results The climate stress testing procedure involves three steps.

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