Kingdom of the Netherlands-The Netherlands: Financial Sector Assessment Program- Technical Note on Climate Risk Analysis

This paper presents a technical note on climate risk analysis in The Netherlands. The Netherlands is exposed to both physical and transition risks from climate change. This Financial Sector Assessment Program FSAP analyzed potential risks to financial stability posed by physical risks from floods and transition risks from nitrogen. In order to assess physical climate risks, bank stress tests were conducted against flood events under a range of scenarios encompassing diverse regions, climate conditions, and flood protection reinforcement plans with different return periods. Despite the sizeable land area in the Netherlands susceptible to flooding, the physical climate stress test has demonstrated that the banking sector exhibits resilience to flood events. As the government’s efforts to reduce nitrogen depositions continue, the banking sector could face transition risks through the credit channel, particularly if loans are extended to financially vulnerable firms in high nitrogen-emitting sectors. The Dutch government should strengthen data sharing and collaboration with floods and climate experts. Flood scenarios designed with detailed flood maps under future climate conditions would provide a more accurate assessment of both climate change impact and adaptation measures.