New stress test model quantifies climate risks for banks

European banks will soon be required to incorporate climate change risks into the stress testing of their equity. Researchers at the Technical University of Munich (TUM) have now developed a new approach in cooperation with the Frankfurt Institute for Risk Management and Regulation (FIRM). In a case study they applied their stress testing method in several CO2 pricing scenarios. Due to sharp rises in probabilities of credit default in several industries, the results show that the bank in question would face significant decreases in capital ratios. The model can help banks to prepare for future risks.

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