CRISK: Measuring the Climate Risk Exposure of the Financial System

Richard Berner, Robert Engle and Hyeyoon Jung

No 977, Staff Reports from Federal Reserve Bank of New York

Abstract: 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.

Keywords: climate risk; financial stability; systemic risk (search for similar items in EconPapers)
JEL-codes: C53 G20 Q54 (search for similar items in EconPapers)
Pages: 108
Date: 2021-09-01
New Economics Papers: this item is included in nep-agr, nep-ban, nep-ene, nep-env and nep-fdg
Note: Revised March 2023. Previous title: “Climate Stress Testing”
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: CRISK: Measuring the Climate Risk Exposure of the Financial System (2023)
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