Occasional Paper Series: ECB Economy-Wide Climate Stress Test. Methodology and Results

The European Central Bank (‘ECB’) performed an economy-wide climate stress test to assess the resilience of European banking system and functioning of financial markets under differing climate scenarios and macroeconomic conditions projected out over 30 years. Credit and market portfolios of approximately 1600 European banks were assessed under varied future climate policies considering direct and indirect and indirect climate risk transmission channels.

The early adoption of net zero policies is viewed to far outweigh the short-term costs of transition as unmitigated physical risks will unfold non-linearly, irreversibly and at an increasingly higher rate over time.

Key Considerations Include

  • Geographical and sectoral sensitivities to physical and transition risk
  • Climate risk and systemic risk
  • Firm-specific vulnerability to climate risk

Real estate sector default probabilities would decrease by an estimated 6.6% from 2020 to 2050 under an orderly transition to a Net Zero Economy relative to a Hot House World scenario, according to projections by the ECB and Network for Greening the Financial System (‘NGFS’).

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