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What's the Cost of "Saving the Planet" for Banks? Assessing the Indirect Impact of Climate Transition Risks on Slovak Banks' Loan Portfolios

Author

Listed:
  • Jozef Kalman

    (National Bank of Slovakia)

  • Jan Klacso

    (National Bank of Slovakia)

  • Roman Vasil

    (National Bank of Slovakia)

  • Juraj Zeman

    (National Bank of Slovakia)

Abstract

The ongoing trend of global warming is damaging not only human society but also economic activity. Central banks, supervisors, and macroprudential authorities are not immune to the climate-related risks in the financial sector. This study analyses how climate transition risks indirectly affect the banking sector through the credit risk channel for both households and non-financial corporations. We integrate Network for Greening the Financial System scenarios into conventional stress testing framework. The analysis focuses on a short-term horizon to reduce the impact of high modeling uncertainty on the outcomes. We find that a relatively smooth substitution of emission-intensive sectors results in relatively low indirect costs for banks. An uneven transition can, however, generate significantly higher credit losses, occasionally exceeding adverse scenario outcomes of conventional stress testing. The results are sensitive to an increase in energy prices or to higher defaults of firms in emission-intensive sectors.

Suggested Citation

  • Jozef Kalman & Jan Klacso & Roman Vasil & Juraj Zeman, 2023. "What's the Cost of "Saving the Planet" for Banks? Assessing the Indirect Impact of Climate Transition Risks on Slovak Banks' Loan Portfolios," Working and Discussion Papers WP 7/2023, Research Department, National Bank of Slovakia.
    • Handle: RePEc:svk:wpaper:1099
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    References listed on IDEAS

    as
    1. Glenn D. Rudebusch, 2021. "Climate Change Is a Source of Financial Risk," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2021(03), pages 01-06, February.
    2. Batten, Sandra, 2018. "Climate change and the macro-economy: a critical review," Bank of England working papers 706, Bank of England.
    3. Gross, Marco & Población, Javier, 2017. "Assessing the efficacy of borrower-based macroprudential policy using an integrated micro-macro model for European households," Economic Modelling, Elsevier, vol. 61(C), pages 510-528.
    4. Pavol Jurca & Ján Klacso & Eugen Tereanu & Marco Forletta & Mr. Marco Gross, 2020. "The Effectiveness of Borrower-Based Macroprudential Measures: A Quantitative Analysis for Slovakia," IMF Working Papers 2020/134, International Monetary Fund.
    5. Faiella, Ivan & Lavecchia, Luciano & Michelangeli, Valentina & Mistretta, Alessandro, 2022. "A climate stress test on the financial vulnerability of Italian households and firms," Journal of Policy Modeling, Elsevier, vol. 44(2), pages 396-417.
    6. Ampudia, Miguel & Lo Duca, Marco & Farkas, Mátyás & Perez-Quiros, Gabriel & Pirovano, Mara & Rünstler, Gerhard & Tereanu, Eugen, 2021. "On the effectiveness of macroprudential policy," Working Paper Series 2559, European Central Bank.
    7. Jan Klacso, 2022. "Incorporating Individual Retail Loan Data into the Macro Stress Testing Framework," Working and Discussion Papers OP 2/2022, Research Department, National Bank of Slovakia.
    8. Jan Klacso, 2014. "Macro Stress Testing Framework at the National Bank of Slovakia," Working and Discussion Papers PP 1/2014, Research Department, National Bank of Slovakia.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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