ABSTRACT
We develop a methodology for climate scenario analysis to assess the vulnerability of a central bank's balance sheet to climate change. Our top-down methodology comprises four sequential steps. First, we select climate scenarios from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). Second, we obtain macroeconomic projections under each scenario from the National Institute Global Econometric Model, which is also provided via the NGFS. Third, we disaggregate the macro-level effects into impacts on individual securities using issuer-specific vulnerability factors for both transition risks and physical risks. Fourth, we estimate the impact on profit projections, and on interest rate, credit, and market risk. We apply the scenario analysis to the balance sheet of De Nederlandsche Bank (DNB) to show that an orderly transition to a low-carbon economy strongly impacts profitability and the interest rate risk in the short term. A disorderly transition or a failure to implement climate policies leads to a significant increase in credit risk and market risk in the long term.
