Designing a macroprudential capital buffer for climate-related risks: an application to transition risk

Florian Bartsch, Iulia Busies, Tina Emambakhsh, Michael Grill, Mathieu Simoens, Martina Spaggiari and Fabio Tamburrini

Climate Policy, 2025, vol. 25, issue 9, 1354-1367

Abstract: This paper investigates macroprudential capital buffers to mitigate systemic transition risks and increase the resilience of the banking sector. Leveraging granular data and state-of-the-art stress testing methods, it quantifies potential bank losses attributed to transition risks. Focusing on short-term transition scenarios, the paper documents a significant variance among banks in their risk exposure, with the most exposed institutions being those characterized by lower excess capital. We introduce a methodological framework for tailoring bank-specific buffer requirements to cover these losses, offering macroprudential authorities a practical method for calibrating climate-related macroprudential capital buffers, complementing microprudential policies. While the focus of this application is on transition risks, the framework can be extended to capture all climate risks in general. The study demonstrates the potential of macroprudential capital buffers to mitigate potential climate-related losses and contributes to the understanding of the appropriate prudential policy response to these challenges.Transition risk may result in significant losses for the banking system.Regulators have recognized the urgency of integrating climate risk considerations within the regulatory framework to mitigate financial vulnerabilities.Macroprudential capital buffers are a key instrument to consider for safeguarding the banking sector against systemic risk challenges posed by climate change.The proposed harmonized framework to calibrate a macroprudential capital buffer for transition risk purposes could usefully guide regulatory authorities when taking action.The framework can be flexibly adjusted to account for different types of climate risk, advancements in stress testing methodology and additional information available to macroprudential authorities.

Date: 2025
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DOI: 10.1080/14693062.2025.2450279

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