Stress testing climate risk: A network-based analysis of the Chinese banking system

Hai-Chuan Xu, Tai-Min Li, Peng-Fei Dai, Duc Khuong Nguyen and Wei-Xing Zhou

Journal of International Money and Finance, 2024, vol. 149, issue C

Abstract: Assessing the impact of climate risks on the financial system is one of the most urgent issues currently. We build a network-based climate risk model to explain how a shock from climate policies translates into shocks in the banking system. Then, we conduct macroprudential stress tests on the Chinese banking system under various climate policy scenarios. We show that under the policy target of peaking the carbon in 2030 and CO2 concentration no more than 500 ppm in 2100, individual banks in China will face equity losses ranging from 1.93% to 14.03%, equivalent to an overall loss of 6.94% in 2025. When considering the electric power sector's adoption of green energy technologies, the adverse effects will be slightly mitigated. Our stress tests suggest that the implementation of climate policies should be gradual and consider potential economic impacts so that climate goals can be achieved without undue shocks to the economy.

Keywords: Systemic risk; Climate policy; Network model; Macroprudential stress testing (search for similar items in EconPapers)
JEL-codes: D85 G01 G21 G32 G33 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:149:y:2024:i:c:s0261560624001943

DOI: 10.1016/j.jimonfin.2024.103207

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