Search Results
Report
Physical Climate Risk Factors and an Application to Measuring Insurers’ Climate Risk Exposure
We construct a novel physical risk factor using a portfolio of REITs, long on those with properties highly exposed to climate risk and short on those with less exposure. Combined with a transition risk factor, we assess U.S. insurers’ climate risk through operations and $13 trillion in asset holdings. Estimating dynamic climate betas, we find higher stock return sensitivity to the physical risk among insurers operating in riskier regions and to transition risk among those holding more brown assets. Using these betas, we calculate capital shortfalls under climate stress scenarios, offering ...
Discussion Paper
What Do Climate Risk Indices Measure?
As interest in understanding the economic impacts of climate change grows, the climate economics and finance literature has developed a number of indices to quantify climate risks. Various approaches have been employed, utilizing firm-level emissions data, financial market data (from equity and derivatives markets), or textual data. Focusing on the latter approach, we conduct descriptive analyses of six text-based climate risk indices from published or well-cited papers. In this blog post, we highlight the differences and commonalities across these indices.
Report
Real Consequences of Shocks to Intermediaries Supplying Corporate Hedging Instruments
I show that shocks to financial intermediaries that supply hedging instruments to corporations have real effects. I exploit a quasi-natural experiment in South Korea in 2010, where regulations required banks to hold enough capital for taking positions in foreign exchange derivatives (FXD). Using the variation in exposure to this regulation across banks, I find that the regulation caused a reduction in the supply of FXD, leading to a significant decline in exports for firms that held derivatives contracts with more exposed banks. These results indicate the crucial role of intermediaries in ...
Discussion Paper
Flood Risk and Firm Location Decisions in the Fed’s Second District
The intensity, duration, and frequency of flooding have increased over the past few decades. According to the Federal Emergency Management Agency (FEMA), 99 percent of U.S. counties have been impacted by a flooding event since 1999. As the frequency of flood events continues to increase, the number of people, buildings, and agriculture exposed to flood risk is only likely to grow. As a previous post points out, measuring the geographical accuracy of such risk is important and may impact bank lending. In this post, we focus on the distribution of flood risk within the Federal Reserve’s ...
Discussion Paper
Physical Climate Risk and Insurers
As the frequency and severity of natural disasters increase with climate change, insurance—the main tool for households and businesses to hedge natural disaster risks—becomes increasingly important. Can the insurance sector withstand the stress of climate change? To answer this question, it is necessary to first understand insurers’ exposure to physical climate risk, that is, risks coming from physical manifestations of climate change, such as natural disasters. In this post, based on our recent staff report, we construct a novel factor to measure the aggregate physical climate risk in ...
Report
U.S. Banks’ Exposures to Climate Transition Risks
We build on the estimated sectoral effects of climate transition policies from the general equilibrium models of Jorgenson et al. (2018), Goulder and Hafstead (2018), and NGFS (2022a) to investigate U.S. banks’ exposures to transition risks. Our results show that while banks’ exposures are meaningful, they are manageable. Exposures vary by model and policy scenario with the largest estimates coming from the NGFS (2022a) disorderly transition scenario, where the average bank exposure reaches 9 percent as of 2022. Banks’ exposures increase with the stringency of a carbon tax policy but ...
Discussion Paper
CRISK: Measuring the Climate Risk Exposure of the Financial System
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. ...
Discussion Paper
How Exposed Are U.S. Banks’ Loan Portfolios to Climate Transition Risks?
Much of the work on climate risk has focused on the physical effects of climate change, with less attention devoted to “transition risks” related to negative economic effects of enacting climate-related policies and phasing out high-emitting technologies. Further, most of the work in this area has measured transition risks using backward-looking metrics, such as carbon emissions, which does not allow us to compare how different policy options will affect the economy. In a recent Staff Report, we capitalize on a new measure to study the extent to which banks’ loan portfolios are exposed ...
Discussion Paper
Does Corporate Hedging of Foreign Exchange Risk Affect Real Economic Activity?
Foreign exchange derivatives (FXD) are a key tool for firms to hedge FX risk and are particularly important for exporting or importing firms in emerging markets. This is because FX volatility can be quite high—up to 120 percent per annum for some emerging market currencies during stress episodes—yet the vast majority of international trades, almost 90 percent, are invoiced in U.S. dollars (USD) or euros (EUR). When such hedging instruments are in short supply, what happens to firms’ real economic activities? In this post, based on my related Staff Report, I use hand-collected FXD ...
Report
Credit Card Banking
Credit card interest rates, the marginal cost of consumption for nearly half of households, currently average 23 percent, far exceeding the rates on any other major type of loan or bond. Why are these rates so high? To understand this, and the economics of credit card banking more generally, we analyze regulatory account-level data on 330 million monthly accounts, representing 90 percent of the US credit card market. Default rates are relatively high at around 5 percent, but explain only a fraction of cards’ rates. Non-interest expenses and rewards payments are more than offset by ...