IMF Working Papers

Climate Transition Risk and Financial Stability in France

Author/Editor:

Rachel Lee ; Hugo Rojas-Romagosa ; Iulia Ruxandra Teodoru ; Xiaoxiao Zhang

Publication Date:

July 12, 2024

Electronic Access:

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Summary:

This study empirically investigates the impact of the climate transition on the French financial sector using a micro-macro approach to examine the long-term effects of climate mitigation and decarbonization policies on sectoral output and the effects on firm profitability and the likelihood of corporate defaults. We employ a recursive-dynamic, multi-regional, multi-sectoral computable general equilibrium (CGE) model to simulate the Fit-for-55 climate scenario and then integrate the sectoral output paths derived from the model into firm-level corporate balance sheets and risks. We then assess the extent of credit exposure of banks to energy-intensive sectors. Our findings indicate that, under the Fit-for-55 scenario, the mining, chemicals and manufacturing sectors might face notable increases in their probability of defaults, in turn creating pockets of vulnerabilities in some parts of the banking system depending on their exposure to these energy-intensive sectors. This highlights the importance for a timely and orderly transition, including integrating climate transition plans into the prudential framework.

Series:

Working Paper No. 2024/144

Subject:

Climate change Environment Financial sector policy and analysis Financial sector risk

Frequency:

regular