Template-Type: ReDIF-Article 1.0

Author-Name: Balint Vargedo
Author-Workplace-Name: Magyar Nemzeti Bank
Author-Email: vargedob@mnb.hu


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

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.

Classification-JEL: G21, G32, Q54
Keywords: climate stress test, transition risk
Pages: 57-82
Volume: 21
Issue: 4
Year: 2022
File-URL: https://en-hitelintezetiszemle.mnb.hu/letoltes/fer-21-4-st2-vargedo.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:21:y:2022:i:4:p:57-82