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September 2021 Revised March 2023
JEL classification: Q54, C53, G20
Authors: Hyeyoon Jung, Robert Engle, and Richard Berner
We develop a market-based methodology to assess banks’ resilience to climate-related risks and study the climate-related risk exposure of large global banks. We introduce a new measure, CRISK, which is the expected capital shortfall of a bank in a climate stress scenario. To estimate CRISK, we construct climate risk factors and dynamically measure banks’ stock return sensitivity (that is, climate beta) to the climate risk factor. We validate the climate risk factor empirically and the climate beta estimates by using granular data on large U.S. banks’ loan portfolios. The measure is useful in quantifying banks’ climate-related risk exposure through the market risk and the credit risk channels.
Hyeyoon Jung declares that she has no relevant or material financial interests that relate to the research described in this paper.
Robert Engle declares that he has no relevant or material financial interests that relate to the research described in this paper.
Richard Berner declares that he has no relevant or material financial interests that relate to the research described in this paper.
Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
