Assessment of bank risk exposure considering climate transition risks

Zekun Ge, Qian Liu and Zi Wei

Finance Research Letters, 2024, vol. 67, issue PA

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.

Keywords: Climate transition risks; Carbon price; Bank risk exposure; Probability of default; Merton model (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pa:s1544612324009334

DOI: 10.1016/j.frl.2024.105903

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