Transcription of Climate Stress Testing - newyorkfed.org
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Climate Stress Testing - newyorkfed.org
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.
the Dynamic Conditional Beta (DCB) model. The third step is to compute CRISK, which is a function of a given nancial rm’s size, leverage, and expected equity loss conditional on climate stress. This step is based on the same methodology as SRISK ofAcharya et al.(2011),Acharya et al.(2012), andBrownlees and Engle(2017), with the climate factor
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