Approaches to Climate Risk Analysis in FSAPs

Staff Climate Notes, July 14, 2022

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Bibliographic details

• Authors: Tobias Adrian, Pierpaolo Grippa, Marco Gross, V. Haksar, Ivo Krznar, Caterina Lepore, Fabian Lipinsky, Hiroko Oura, Sujan Lamichhane, Apostolos Panagiotopoulos
• Published: July 14, 2022
• Series: Staff Climate Notes
• DOI: https://doi.org/10.5089/9798400212895.066

Core objective and framing

• Sets out the IMF staff’s emerging approach to assessing the impact of climate change on banking sector stability risks within the Financial Sector Assessment Program (FSAP).
• Emphasizes that understanding climate risks is key to preparing for a successful transition to a lower carbon global economy and unlocking opportunities from technological progress and structural transformation.
• Focuses on methods IMF staff are deploying to raise awareness of risks and adaptation needs, including:
  • need for banks to develop tools to manage climate risks, and
  • need for financial sector supervisory authorities to adequately supervise climate-related risks.

Primer on climate risk (terminology and concepts)

• Distinguishes two principal categories of climate risk:
  • transition risk
  • physical risk
• Explains technical terms and concepts used in climate risk analysis relevant for FSAP work.

Modifying standard FSAP risk analysis to incorporate climate risk

• Describes how the standard risk analysis framework used in FSAPs would be modified in broad terms to integrate climate risk considerations.
• Highlights mapping channels from macroeconomic and real-economy effects into banking sector stability risks.

Approaches to analyzing physical versus transition risk

• Discusses different analytical approaches for:
  • physical risk: impacts across sectors, geographies, and implications for the macro-economy
  • transition risk: policy, technology, and market-driven changes during decarbonization pathways
• Explains how effects on the macro-economy and real sectors vary by sector and geography, and how these heterogenous effects feed into bank exposures and stability assessments.

Mapping to banking sector and stress testing

• Illustrates how physical and transition risks map into banking sector stability risk assessments undertaken in FSAPs.
• Positions stress testing and scenario analysis as central tools for quantifying potential impacts on bank portfolios and system-wide stability.

Illustrative applications and examples

• Provides examples from recent FSAPs to illustrate key concepts and methodological choices used in practice.

Challenges, data gaps, and uncertainty

• Identifies major challenges confronting climate risk analysis in FSAPs, including:
  • data gaps
  • uncertainty regarding climate projections
  • long simulation horizons required for climate risk analysis
• Notes methodological and practical constraints that limit precision but underlines the role of analysis in raising awareness and guiding adaptation.

Policy implications and recommendations (IMF staff focus)

• Emphasizes the need for:
  • banks to develop tools to manage climate risks,
  • financial sector supervisory authorities to adequately supervise climate risk,
  • integrated analytical approaches within FSAPs to inform policy and supervisory priorities.

Source: Approaches to Climate Risk Analysis in FSAPs, Staff Climate Notes 2022/005 (July 14, 2022).

Content in this bundle

• Approaches to Climate Risk Analysis in FSAPs; IMF Staff Climate Note 2022/005; July 2022
  • Approaches to Climate Risk Analysis in FSAPs; IMF Staff Climate Note 2022/005; July 2022 (Markdown version)
  • Approaches to Climate Risk Analysis in FSAPs; IMF Staff Climate Note 2022/005; July 2022 (PDF)