CEFGroup New Publication on Climate Stress Testing

Climate and Energy Finance Group (CEFGroup)’s recent publication in International Review of Financial Analysis (IRFA), Climate Transition Risk in U.S. Loan Portfolios: Are All Banks the Same?, is now available HERE.

The paper uses a bottom-up, loan-level forward-looking approach to stress test banks’ exposure to climate transition risk (CTR) in syndicated loans. It highlights that:

• Banks vary in CTR, not only due to their exposure to the energy sectors, but also due to borrowers’ carbon emission profiles from other sectors;
• CTR is stable over time, save for a temporary (in some cases) and permanent (in others), reduction after the Paris Agreement;
• From the stress test, the median loss is 0.5% of U.S. syndicated loans, representing a proportional decrease of 4.1% in CET1 capital; and
• Banks’ vulnerabilities are also driven by the ex-ante financial risk of their borrowers more generally, highlighting that climate risk is not independent from conventional risks

Authors: Dr Quyen Nguyen, Professor Ivan Diaz-Rainey, Dr Duminda Kuruppuarachchi, Dr Matt McCarten (University of Edinburgh), and Dr Eric Tan (The University of Queensland)