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Climate Stress Test: The Impact of Carbon Price Shock on the Probability of Default in the Hungarian Banking System

Author

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  • Balint Vargedo

    (Magyar Nemzeti Bank)

Abstract

This study presents the methodology and results of a transition risk climate stress test carried out for credit institutions, focusing on the methodology of a sectoral module developed for the analysis. Using a sectoral network derived from an inputoutput table, the sectoral module distributes a price shock between activities with higher greenhouse gas emission intensity and the related sectors. Results suggest that the sectors with the largest exposure to transition are electricity and gas supply. The probability of default for these two sectors may increase by 1.5 to 2.3 percentage points compared to the baseline. The transition risks for various sectors are highly heterogeneous. Based on Monte Carlo simulations, the extent of the transition risks for Hungarian banks also varies significantly. The advantage of this methodology lies in its ability to estimate the magnitude of macroeconomic shocks and the transition differences across sectors, and its ease of integration into stress testing processes.

Suggested Citation

  • Balint Vargedo, 2022. "Climate Stress Test: The Impact of Carbon Price Shock on the Probability of Default in the Hungarian Banking System," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 21(4), pages 57-82.
    • Handle: RePEc:mnb:finrev:v:21:y:2022:i:4:p:57-82
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    References listed on IDEAS

    as
    1. Daron Acemoglu & Philippe Aghion & Leonardo Bursztyn & David Hemous, 2012. "The Environment and Directed Technical Change," American Economic Review, American Economic Association, vol. 102(1), pages 131-166, February.
    2. Gergõ Horváth, 2021. "Corporate Credit Risk Modelling in the Supervisory Stress Test of the Magyar Nemzeti Bank," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 20(1), pages 43-73.
    3. Renato Ritter, 2022. "Banking Sector Exposures to Climate Risks - Overview of Transition Risks in the Hungarian Corporate Loan Portfolio," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 21(1), pages 32-55.
    4. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
    5. Eszter Boros, 2020. "Risks of Climate Change and Credit Institution Stress Tests," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 19(4), pages 107-131.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    climate stress test; transition risk;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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