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A climate stress-test of the financial system

Authors: Battiston, Stefano; Mandel, Antoine; Monasterolo, Irene; Schütze, Franziska; Visentin, Gabriele;

A climate stress-test of the financial system

Abstract

The urgency of estimating the impact of climate risks on the financial system is increasingly recognized among scholars and practitioners. By adopting a network approach to financial dependencies, we look at how climate policy risk might propagate through the financial system. We develop a network-based climate stress-test methodology and apply it to large Euro Area banks in a ‘green’ and a ‘brown’ scenario. We find that direct and indirect exposures to climate-policy-relevant sectors represent a large portion of investors’ equity portfolios, especially for investment and pension funds. Additionally, the portion of banks’ loan portfolios exposed to these sectors is comparable to banks’ capital. Our results suggest that climate policy timing matters. An early and stable policy framework would allow for smooth asset value adjustments and lead to potential net winners and losers. In contrast, a late and abrupt policy framework could have adverse systemic consequences.

Countries
France, Switzerland, France, France, Austria, France
Keywords

Governance, 330, 3301 Social Sciences (miscellaneous), 10003 Department of Finance, 2301 Environmental Science (miscellaneous), [SHS.ECO]Humanities and Social Sciences/Economics and Finance, 330 Economics, Business, [SHS.ECO] Humanities and Social Sciences/Economics and Finance

  • BIP!
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    selected citations
    These citations are derived from selected sources.
    This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
    860
    popularity
    This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
    Top 0.01%
    influence
    This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
    Top 0.1%
    impulse
    This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
    Top 1%
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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
860
Top 0.01%
Top 0.1%
Top 1%
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