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© 2022 International Monetary Fund

WP/22/163

IMF Working Paper

Monetary and Capital Markets Department

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

Prepared by Stephane Hallegatte, Fabian Lipinsky, Paola Morales, Hiroko Oura, Nicola Ranger, Martijn Gert Jan Regelink, and Henk Jan Reinders

Authorized for distribution by Vikram Haksar

August 2022

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

ABSTRACT: Bank stress tests of climate change risks are relatively new, but are rapidly proliferating. The IMF and World Bank staff collaborated to develop an experimental macro scenario stress testing approach to examine physical risks for banks by building a dynamic stochastic general equilibrium model linked to global climate and a catastrophe risk model specifically for the Philippines. Our model shows that the impact of extremely rare typhoons on GDP could already be systemic and worsen substantially with climate change. However, bank capital declines only modestly unless the event is compounded with other disasters, partly thanks to the strength of Philippines’ banks and economy before the COVID crisis. However, more work is needed before drawing strong conclusions about the relevance of climate risk, as the model focused only on typhoons’ physical capital destructions and their macroeconomic-level transmissions to banks.

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Title Page

WORKING PAPERS

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

Prepared by Stephane Hallegatte, Fabian Lipinsky, Paola Morales, Hiroko Oura, Nicola Ranger, Martijn Gert Jan Regelink, and Henk Jan Reinders

Contents

  • Glossary

  • Executive Summary

  • Introduction

  • Climate Scenario

  • Disaster Scenarios

  • Macro Scenarios

  • Bank Stress Test

  • Alternative Scenarios and Estimates

  • Conclusion

  • Annex I. Macro Scenario Model

  • II. Bank Stress Test Model

  • III. Financial Soundness Indicator of the Philippines

  • IV. Philippines Selected Economic Indicators, 2016–21

  • References

  • FIGURES

  • 1. Approach—Bank Stress Testing of Physical Risks

  • 2. Climate Change’s Impact on Typhoon Characteristics in the Philippines under RCP 8.5

  • 3. Estimated Physical Capital Losses

  • 4. GDP Assumptions for Climate Change Stress Test

  • 5. Climate Change Stress Test—Impact on Total Bank Capital Ratio

  • 6. Damage from typhoons in Philippines, change since 2005

  • TABLES

  • 1. Disasters’ Impact on Capital and GDP for the Philippines

  • 2. Difference between NGFS and Authors’ estimates: Damage rate and GDP

Glossary

AE

Advanced economy

AFC

Asian financial crisis

AR

Assessment report

BIS

Bank for International Settlements

BoE

Bank of England

CAT

Catastrophe (risk model)

CGM

Computable general equilibrium model

DNB

De Nederlandsche Bank

DSGE

Dynamic stochastic general equilibrium

ECB

European Central Bank

EMDE

Emerging market and developing economy

FSAP

Financial Sector Assessment Program

FSI

Financial Stability Institute

GCM

General circulation model

GFC

Global financial crisis

IAM

Integrated assessment model

IPCC

Intergovernmental Panel on Climate Change

LGD

Loss given default

NGFS

Network of Greening the Financial System

PAGASA

Philippines Atmospheric, Geophysical, and Astronomical Services Administration

RCM

Regional climate model

RCP

Representative Concentration Pathway

TC

Tropical cyclone

TCFD

Task Force on Climate-Related Financial Disclosures

TFP

Total factor productivity

UNEP

United Nations Environmental Programme

VaR

Value at Risk

WEO

World Economic Outlook

Bank Stress Testing of Physical Risks under Climate Change Macro Scenarios: Typhoon Risks to the Philippines
Author: Stephane Hallegatte, Mr. Fabian Lipinsky, Paola Morales, Ms. Hiroko Oura, Nicola Ranger, Martijn Gert Jan Regelink, and Henk Jan Reinders