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Bank Stress Testing of Physical Risks under Climate Change Macro Scenarios: Typhoon Risks to the Philippines
Author:
Stephane Hallegatte
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,
Mr. Fabian Lipinsky
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,
Paola Morales
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,
Ms. Hiroko Oura
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,
Nicola Ranger
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Martijn Gert Jan Regelink
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, and
Henk Jan Reinders
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Series:
IMF Working Papers
Volume/Issue:
Volume 2022: Issue 163
Language:
English
Publication Date:
19 Aug 2022
DOI:
https://doi.org/10.5089/9798400217258.001
ISBN:
9798400217258
ISSN:
1018-5941
Pages:
49
Keywords:
Climate change; bank; stress test; financial stability; CAT model; disasters; bank stress testing; bank stress tests; climate change macro scenario; annex I. macro scenario model; climate change stress test; Natural disasters; Stress testing; Financial sector stability; Global; climate scenario; climate model; physical capital; simulation result
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Bank stress tests of climate change risks are relatively new, but are rapidly proliferating. The IMF and World Bank staff collaborated to develop an experimental macro scenario stress testing approach to examine physical risks for banks by building a dynamic stochastic general equilibrium model linked to global climate and a catastrophe risk model specifically for the Philippines. Our model shows that the impact of extremely rare typhoons on GDP could already be systemic and worsen substantially with climate change. However, bank capital declines only modestly unless the event is compounded with other disasters, partly thanks to the strength of Philippines’ banks and economy before the COVID crisis. However, more work is needed before drawing strong conclusions about the relevance of climate risk, as the model focused only on typhoons’ physical capital destructions and their macroeconomic-level transmissions to banks.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund