IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v67y2024ipas1544612324009334.html
   My bibliography  Save this article

Assessment of bank risk exposure considering climate transition risks

Author

Listed:
  • Ge, Zekun
  • Liu, Qian
  • Wei, Zi

Abstract

This study utilizes the Merton model to assess how the climate transition risk exposure of banks may be affected by transition risk shocks across a 30-year horizon, considering three representative climate scenarios outlined by the Central Banks and Supervisors Network for Greening the Financial System (NGFS). The calculation results show that the rise in carbon prices will increase corporate costs and reduce operating profits, thereby increasing the probability of corporate default and ultimately raising the overall level of banks' credit risk exposure, with utilities and energy sectors being the most affected. Variations in loan distributions result in different transition risk impacts across bank types, with large state-owned banks having higher exposure due to loans in carbon-intensive sectors.

Suggested Citation

  • Ge, Zekun & Liu, Qian & Wei, Zi, 2024. "Assessment of bank risk exposure considering climate transition risks," Finance Research Letters, Elsevier, vol. 67(PA).
    • Handle: RePEc:eee:finlet:v:67:y:2024:i:pa:s1544612324009334
    DOI: 10.1016/j.frl.2024.105903
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612324009334
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2024.105903?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Roncoroni, Alan & Battiston, Stefano & Escobar-Farfán, Luis O.L. & Martinez-Jaramillo, Serafin, 2021. "Climate risk and financial stability in the network of banks and investment funds," Journal of Financial Stability, Elsevier, vol. 54(C).
    2. Ströbel, Johannes & Wurgler, Jeffrey, 2021. "What do you think about climate finance?," CEPR Discussion Papers 16622, C.E.P.R. Discussion Papers.
    3. Nguyen, Quyen & Diaz-Rainey, Ivan & Kuruppuarachchi, Duminda & McCarten, Matthew & Tan, Eric K.M., 2023. "Climate transition risk in U.S. loan portfolios: Are all banks the same?," International Review of Financial Analysis, Elsevier, vol. 85(C).
    4. Stefano Carattini & Garth Heutel & Givi Melkadze, 2023. "Climate Policy, Financial Frictions, and Transition Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 778-794, December.
    5. Zhang, Zehua & Zhao, Ran, 2022. "Carbon emission and credit default swaps," Finance Research Letters, Elsevier, vol. 50(C).
    6. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    7. Stefano Battiston & Antoine Mandel & Irene Monasterolo & Franziska Schütze & Gabriele Visentin, 2017. "A climate stress-test of the financial system," Nature Climate Change, Nature, vol. 7(4), pages 283-288, April.
    8. Francesca Diluiso & Barbara Annicchiarico & Matthias Kalkuhl & Jan C. Minx, 2020. "Climate Actions and Stranded Assets: The Role of Financial Regulation and Monetary Policy," CEIS Research Paper 501, Tor Vergata University, CEIS, revised 22 Jul 2020.
    9. Tran, Vuong Thao & Phan, Dinh Hoang Bach & Tee, Chwee-Ming & Nguyen, Dat Thanh, 2024. "Unmasking the carbon conundrum: How emissions impact stock price crash risk," Finance Research Letters, Elsevier, vol. 64(C).
    10. Stefano Carattini & Garth Heutel & Givi Melkadze, 2023. "Climate Policy, Financial Frictions, and Transition Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 778-794, December.
    11. Joeri Rogelj & Alexander Popp & Katherine V. Calvin & Gunnar Luderer & Johannes Emmerling & David Gernaat & Shinichiro Fujimori & Jessica Strefler & Tomoko Hasegawa & Giacomo Marangoni & Volker Krey &, 2018. "Scenarios towards limiting global mean temperature increase below 1.5 °C," Nature Climate Change, Nature, vol. 8(4), pages 325-332, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ferentinos, Konstantinos & Gibberd, Alex & Guin, Benjamin, 2023. "Stranded houses? The price effect of a minimum energy efficiency standard," Energy Economics, Elsevier, vol. 120(C).
    2. Diluiso, Francesca & Annicchiarico, Barbara & Kalkuhl, Matthias & Minx, Jan C., 2021. "Climate actions and macro-financial stability: The role of central banks," Journal of Environmental Economics and Management, Elsevier, vol. 110(C).
    3. Barbara Annicchiarico & Stefano Carattini & Carolyn Fischer & Garth Heutel, 2022. "Business Cycles and Environmental Policy: A Primer," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 3(1), pages 221-253.
    4. Gourdel, Régis & Monasterolo, Irene & Dunz, Nepomuk & Mazzocchetti, Andrea & Parisi, Laura, 2024. "The double materiality of climate physical and transition risks in the euro area," Journal of Financial Stability, Elsevier, vol. 71(C).
    5. Talan B. İşcan & Benjamin Dennis, 2024. "A New Measure of Climate Transition Risk Based on Distance to a Global Emission Factor Frontier," Finance and Economics Discussion Series 2024-017, Board of Governors of the Federal Reserve System (U.S.).
    6. Huang, Bihong & Punzi, Maria Teresa & Wu, Yu, 2022. "Environmental regulation and financial stability: Evidence from Chinese manufacturing firms," Journal of Banking & Finance, Elsevier, vol. 136(C).
    7. Han, Linna & Abedin, Mohammad Zoynul & Wang, Xianzi & Alharbi, Samar S. & Wang, Yong, 2024. "Will fighting climate change affect commercial banks? A carbon tax policy simulation," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    8. Nguyen, Quyen & Diaz-Rainey, Ivan & Kuruppuarachchi, Duminda & McCarten, Matthew & Tan, Eric K.M., 2023. "Climate transition risk in U.S. loan portfolios: Are all banks the same?," International Review of Financial Analysis, Elsevier, vol. 85(C).
    9. Pongsak Luangaram & Yuthana Sethapramote & Kannika Thampanishvong & Gazi Salah Uddin, 2024. "Climate Risk and Financial Stability: A Systemic Risk Perspective from Thailand," PIER Discussion Papers 224, Puey Ungphakorn Institute for Economic Research.
    10. Ferrari, Alessandro & Nispi Landi, Valerio, 2024. "Whatever it takes to save the planet? Central banks and unconventional green policy," Macroeconomic Dynamics, Cambridge University Press, vol. 28(2), pages 299-324, March.
    11. Berlin, Mitchell & Byun, Sung Je & D'Erasmo, Pablo & Yu, Edison, 2024. "Measuring climate transition risk at the regional level with an application to community banks," European Economic Review, Elsevier, vol. 170(C).
    12. Döttling, Robin & Rola-Janicka, Magdalena, 2023. "Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation," OSF Preprints ds7bx, Center for Open Science.
    13. Mirza, Nawazish & Umar, Muhammad & Horobet, Alexandra & Boubaker, Sabri, 2024. "Effects of climate change and technological capex on credit risk cycles in the European Union," Technological Forecasting and Social Change, Elsevier, vol. 204(C).
    14. Louis Daumas, 2024. "Financial stability, stranded assets and the low‐carbon transition – A critical review of the theoretical and applied literatures," Journal of Economic Surveys, Wiley Blackwell, vol. 38(3), pages 601-716, July.
    15. Gong, Xu & Fu, Chengbo & Huang, Qiping & Lin, Meimei, 2022. "International political uncertainty and climate risk in the stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    16. Carattini, Stefano & Kim, Giseong & Melkadze, Givi & Pommeret, Aude, 2024. "Carbon taxes and tariffs, financial frictions, and international spillovers," European Economic Review, Elsevier, vol. 170(C).
    17. David Comerford & Alessandro Spiganti, 2023. "The Carbon Bubble: climate policy in a fire‐sale model of deleveraging," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(3), pages 655-687, July.
    18. Hyeyoon Jung & João A. C. Santos & Lee Seltzer, 2023. "U.S. Banks’ Exposures to Climate Transition Risks," Staff Reports 1058, Federal Reserve Bank of New York.
    19. Livieri, Giulia & Radi, Davide & Smaniotto, Elia, 2024. "Pricing transition risk with a jump-diffusion credit risk model: evidences from the CDS market," LSE Research Online Documents on Economics 123650, London School of Economics and Political Science, LSE Library.
    20. Reinders, Henk Jan & Schoenmaker, Dirk & van Dijk, Mathijs, 2023. "A finance approach to climate stress testing," Journal of International Money and Finance, Elsevier, vol. 131(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:67:y:2024:i:pa:s1544612324009334. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.