Discussion Paper

CRISK: Measuring the Climate Risk Exposure of the Financial System

Abstract: A growing number of climate-related policies have been adopted globally in the past thirty years (see chart below). The risk to economic activity from changes in policies in response to climate risks, such as carbon taxes and green subsidies, is often referred to as transition risk. Transition risk can adversely affect the real economy through the banking sector. For example, a shock to borrowers’ transition risk can impair their ability to repay, which can then lead to an amplified effect on banks’ current and expected future profits, resulting in a systemic undercapitalization of banks. In a recent Staff Report co-authored with Robert Engle and Richard Berner, we examine whether banks are sufficiently capitalized to absorb losses during stressful conditions due to heightened climate (transition) risk.

Keywords: climate; climate risk; financial stability; stress testing; systemic risk;

JEL Classification: G1; G2;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2023-04-20

Number: 20230420a