Beyond the Dikes: Flood Scenarios for Financial Stability Risk Analysis

Caterina Lepore and Junghwan Mok

No 2024/197, IMF Working Papers from International Monetary Fund

Abstract: We assess financial stability risks from floods in the Netherlands using a comprehensive set of flood scenarios considering different factors including geographical regions, flood types, climate conditions, return periods, and adaptation. The estimated damage from each flood scenario is used to calibrate the corresponding macro-financial scenario for bank stress tests. Our results show the importance of considering these heterogeneous factors when conducting physical climate risk stress tests, as the impact of floods on bank capital varies significantly by scenario. We find that climate change amplifies the adverse impact on banks’ capital, but stronger flood defenses in the Netherlands can help mitigate some impacts. Further, we find a non-linear relationship between flood damages and banks’ capital depletion, highlighting the importance of considering extreme scenarios.

Keywords: Physical risk; flood scenario; banking stress test; climate risk analysis; climate risk stress tests; bank capital; Natural disasters; Climate change; Commercial banks; Housing prices; Stress testing; Global (search for similar items in EconPapers)
Pages: 41
Date: 2024-09-13
New Economics Papers: this item is included in nep-agr, nep-ban, nep-env and nep-ipr
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