Abstract

We investigate the impact of climate transition risk on the European financial system, evaluating the expected capital shortfall of the major European banks in a climate stress scenario. Following the methodology proposed by Jung et al. [(2021). “Climate stress testing”. FRB of New York Staff Report. (977).], we measure the dynamic transition risk betas and compare them to the non financial corporate loans exposure, obtained from EBA, of each bank towards the energy sector. Furthermore, we estimate the dynamic risk premium associated with the selected climate transition risk factor in order to explain and eventually exploit stock market anomalies. Finally we estimate the countries’ exposures and we find that at the end of 2022, aggregated European CRISK can be quantified in about EUR 165 bn. As far as the climate premium is concerned, we find evidence of a dynamic climate risk premium negatively correlated to transition risk exposure.