Bank Stress Testing of Physical Risks under Climate Change Macro Scenarios: Typhoon Risks to the Philippines

By Stephane Hallegatte, Fabian Lipinsky, Paola Morales, Hiroko Oura, Nicola Ranger, Martijn Gert Jan Regelink, Henk Jan Reinders

August 19, 2022

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Stephane Hallegatte, Fabian Lipinsky, Paola Morales, Hiroko Oura, Nicola Ranger, Martijn Gert Jan Regelink, and Henk Jan Reinders. Bank Stress Testing of Physical Risks under Climate Change Macro Scenarios: Typhoon Risks to the Philippines, (USA: International Monetary Fund, 2022) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Bank stress tests of climate change risks are relatively new, but are rapidly proliferating. The IMF and World Bank staff collaborated to develop an experimental macro scenario stress testing approach to examine physical risks for banks by building a dynamic stochastic general equilibrium model linked to global climate and a catastrophe risk model specifically for the Philippines. Our model shows that the impact of extremely rare typhoons on GDP could already be systemic and worsen substantially with climate change. However, bank capital declines only modestly unless the event is compounded with other disasters, partly thanks to the strength of Philippines’ banks and economy before the COVID crisis. However, more work is needed before drawing strong conclusions about the relevance of climate risk, as the model focused only on typhoons’ physical capital destructions and their macroeconomic-level transmissions to banks.

Subject: Climate change, Environment, Financial sector policy and analysis, Financial sector stability, Natural disasters, Stress testing

Keywords: Annex I. macro scenario model, Bank, Bank stress testing, Bank stress tests, CAT model, Climate change, Climate change macro scenario, Climate change stress test, Climate model, Climate scenario, Disasters, Financial sector stability, Financial stability, Global, Natural disasters, Physical capital, Simulation result, Stress test, Stress testing

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/163
Stock No:

WPIEA2022163
ISBN:

9798400217258
ISSN:

1018-5941

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