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

Jozef Kalman (), Ján Klacso, Roman Vasil and Juraj Zeman ()
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Jozef Kalman: National Bank of Slovakia
Juraj Zeman: National Bank of Slovakia

No WP 7/2023, Working and Discussion Papers from Research Department, 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.

JEL-codes: C60 E50 G32 O44 Q40 Q54 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2023-10
New Economics Papers: this item is included in nep-ban, nep-ene, nep-env and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:svk:wpaper:1099

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