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 measure to study the Climate -related risk exposure of large global banks in the collapse of fossil-fuel prices in 2020. Key words: Climate risk, financial stability, Stress Testing _____ Jung: Federal Reserve bank of New York (email: Engle, Berner: Stern School of Business, New York University (email: The authors thank German Gutierrez, Quirin Fleckenstein, Sebastian Hillenbrand, and participants at the Volatility and Risk Institute Conference, EBA EAIA Seminar, and Green Swan Conference for their helpful comments and suggestions.))

Understanding the impact of climate change on nancial systems is an important question for researchers, central banks, and nancial regulators across the world.Krueger et al. ... If banks systemically su er substantial losses following an abrupt rise in the ... list of top 50 global banks by oil and gas loan exposure is presented inTable 25in the

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