IMF Working Papers

Beyond the Dikes: Flood Scenarios for Financial Stability Risk Analysis

By Caterina Lepore, Junghwan Mok

September 13, 2024

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Format: Chicago

Caterina Lepore, and Junghwan Mok. "Beyond the Dikes: Flood Scenarios for Financial Stability Risk Analysis", IMF Working Papers 2024, 197 (2024), accessed December 21, 2024, https://doi.org/10.5089/9798400289545.001

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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

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.

Subject: Climate change, Commercial banks, Environment, Financial institutions, Financial sector policy and analysis, Housing prices, Natural disasters, Prices, Stress testing

Keywords: Bank capital, Banking stress test, Climate change, Climate risk analysis, Climate risk stress tests, Commercial banks, Flood scenario, Global, Housing prices, Natural disasters, Physical risk, Stress testing

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