20220818-IMF-Bank_Stress_Testing_of_Physical_Risks_under_Climate_Change_Macro_Scenarios_Typhoon_Risks_to_the_Philippines_49页_1mb

Bank Stress Testing of Physical Risks under Climate Change Macro Scenarios: Typhoon Risks to the Philippines

This working paper introduces a novel macro scenario stress testing approach to examine physical climate risks on banks. Using the Philippines as a case study, the authors combined a dynamic stochastic general equilibrium (DSGE) model with a catastrophe risk (CAT) model and climate projections to assess the impact of typhoons under climate change. The key findings are summarized below.

🔍 Summary

🚨 Research Approach

1. Methodology:
   • The study uses a four-module framework:
     • Climate scenario: Future typhoon frequency and intensity under RCP 8.5.
     • Disaster scenario: Damage estimates from typhoon wind speeds via a CAT model (incorporates historical data, asset location, and vulnerability).
     • Macro scenario: DSGE model links physical damage to GDP and bank capital.

⭐ Key Findings

• Economic Impact:
  🔶 Extremely rare typhoons (e.g., 100-year return period) reduce Philippines GDP by 3.5–8.5 percentage points, which is more severe than past financial crises.

• Bank Capital:
  Without compound risks (e.g., pandemic), future typhoons reduce bank capital ratios by up to 1 percentage point in the most severe scenarios (e.g., 500-year return period), which is manageable due to strong banking sector buffers.
  ➔ However, compound risks with pandemics could reduce capital by nearly 9 percentage points.

• Comparison with NGFS:
  Results align with other studies under 2060 scenarios, but the DSGE-CAT coupling offers richer details for tail events.

⚠️ Limitations and Uncertainties

• Models focus on physical destruction from wind only (excluding floods, sea-level rise).
• Limited micro-level data for industry-specific or localized asset damage.
• Uncertainties exist due to deep uncertainties in climate science and model misspecification.

🌍 Broader Context

• This is the first exercise coupling CAT models with climate projections for bank stress testing in an emerging market.
• While climate risks are systemic under rare disasters, chronic impacts appear less concerning than acute events.

☁️ Future Work

• Include composite risks (e.g., typhoon + flood).
• Incorporate additional transmission channels (e.g., property collateral values or industry-specific impacts).
• Extend scenarios over longer horizons and explore policy responses to mitigate risks.

This analysis highlights the importance of country-specific models for assessing climate physical risks but emphasizes caution due to significant uncertainties.