Bank Stress Testing of Physical Risks under Climate Change Macro Scenarios: Typhoon Risks to the Philippines
IMF Working Papers, August 19, 2022
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- Bank Stress Testing of Physical Risks under Climate Change Macro Scenarios: Typhoon Risks to the Philippines
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Bibliographic details
- Authors: Stephane Hallegatte, Fabian Lipinsky, Paola Morales, Hiroko Oura, Nicola Ranger, Martijn Gert Jan Regelink, Henk Jan Reinders
- Published: August 19, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400217258.001
Study overview and methodology
- Collaboration between IMF and World Bank staff to develop an experimental macro scenario stress testing approach.
- Model components:
- A dynamic stochastic general equilibrium (DSGE) model linked to global climate.
- A catastrophe (CAT) risk model developed specifically for the Philippines.
- Focus: physical risks from typhoons, capturing physical capital destructions and macroeconomic-level transmissions to banks.
Key findings and results
- The impact of extremely rare typhoons on GDP could already be systemic and could worsen substantially with climate change.
- Bank capital declines only modestly in the modeled scenarios unless the typhoon event is compounded with other disasters.
- The modest bank capital decline is attributed in part to the strength of Philippines’ banks and economy before the COVID crisis.
- Caveat: the model focused only on typhoons’ physical capital destructions and their macroeconomic-level transmissions to banks; further work is required before drawing strong conclusions about the overall relevance of climate risk.
Subject areas and keywords
- Subjects: Climate change; Environment; Financial sector policy and analysis; Financial sector stability; Natural disasters; Stress testing.
- Keywords include: 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 metadata and identifiers
- Authors: Stephane Hallegatte, Fabian Lipinsky, Paola Morales, Hiroko Oura, Nicola Ranger, Martijn Gert Jan Regelink, Henk Jan Reinders
- Date: August 19, 2022
- Series: Working Paper No. 2022/163
- Issue: 163
- Volume: 2022
- Pages: 49
- DOI: https://doi.org/10.5089/9798400217258.001
- ISBN: 9798400217258
- ISSN: 1018-5941
- Stock No: WPIEA2022163
Principal policy-relevant implication
- More analytical work is needed to assess the broader relevance of climate risk to banks, since the current model assesses only direct physical capital destruction from typhoons and their macroeconomic transmissions to banks.
IMF Working Paper No. 2022/163, "Bank Stress Testing of Physical Risks under Climate Change Macro Scenarios: Typhoon Risks to the Philippines", August 19, 2022.
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