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Keywords:climate risk 

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U.S. Banks’ Exposures to Climate Transition Risks

We build on the estimated sectoral effects of climate transition policies from the general equilibrium models of Jorgenson et al. (2018), Goulder and Hafstead (2018), and NGFS (2022a) to investigate U.S. banks’ exposures to transition risks. Our results show that while banks’ exposures are meaningful, they are manageable. Exposures vary by model and policy scenario with the largest estimates coming from the NGFS (2022a) disorderly transition scenario, where the average bank exposure reaches 9 percent as of 2022. Banks’ exposures increase with the stringency of a carbon tax policy but ...
Staff Reports , Paper 1058

Discussion Paper
How Do Natural Disasters Affect U.S. Small Business Owners?

Recent research has linked climate change and socioeconomic inequality (see here, here, and here). But what are the effects of climate change on small businesses, particularly those owned by people of color, which tend to be more resource-constrained and less resilient? In a series of two posts, we use the Federal Reserve’s Small Business Credit Survey (SBCS) to document small businesses’ experiences with natural disasters and how these experiences differ based on the race and ethnicity of business owners. This first post shows that small firms owned by people of color sustain losses from ...
Liberty Street Economics , Paper 20220906a

Discussion Paper
CRISK: Measuring the Climate Risk Exposure of the Financial System

A growing number of climate-related policies have been adopted globally in the past thirty years (see chart below). The risk to economic activity from changes in policies in response to climate risks, such as carbon taxes and green subsidies, is often referred to as transition risk. Transition risk can adversely affect the real economy through the banking sector. For example, a shock to borrowers’ transition risk can impair their ability to repay, which can then lead to an amplified effect on banks’ current and expected future profits, resulting in a systemic undercapitalization of banks. ...
Liberty Street Economics , Paper 20230420a

Working Paper
California Wildfires, Property Damage, and Mortgage Repayment

This paper examines wildfires’ impact on mortgage repayment using novel data that combines property-level damages and mortgage performance data. We find that 90-day delinquencies were 4 percentage points higher and prepayments were 16 percentage points higher for properties that were damaged by wildfires compared to properties 1 to 2 miles outside of the wildfire, which suggests higher risks to mortgage markets than found in previous studies. We find no significant changes in delinquency or prepayment for undamaged properties inside a wildfire boundary. Prepayments are not driven by ...
Working Papers , Paper 23-05

Journal Article
Extreme Weather and Financial Market Uncertainty

Extreme weather can have negative, minimal, or even positive effects on business performance—creating significant uncertainty about outcomes for those businesses. Financial markets show heightened uncertainty among investors for companies that have been hit by hurricanes. This uncertainty persists for several months after a hurricane’s landfall, as reflected by continued discussion of hurricanes in analyst calls. Comparing expected volatility to actual volatility shows that markets have underreacted to the uncertainty caused by hurricanes. After Hurricane Sandy, a particularly salient ...
FRBSF Economic Letter , Volume 2024 , Issue 01 , Pages 5

Report
Climate Stress Testing

We explore the design of climate stress tests to assess and manage macroprudential risks from climate change in the financial sector. We review the climate stress scenarios currently employed by regulators, highlighting the need to (i) consider many transition risks as dynamic policy choices; (ii) better understand and incorporate feedback loops between climate change and the economy; and (iii) further explore “compound risk” scenarios in which climate risks co-occur with other risks. We discuss how the process of mapping climate stress scenarios into financial firm outcomes can ...
Staff Reports , Paper 1059

Discussion Paper
Flood Risk and Firm Location Decisions in the Fed’s Second District

The intensity, duration, and frequency of flooding have increased over the past few decades. According to the Federal Emergency Management Agency (FEMA), 99 percent of U.S. counties have been impacted by a flooding event since 1999. As the frequency of flood events continues to increase, the number of people, buildings, and agriculture exposed to flood risk is only likely to grow. As a previous post points out, measuring the geographical accuracy of such risk is important and may impact bank lending. In this post, we focus on the distribution of flood risk within the Federal Reserve’s ...
Liberty Street Economics , Paper 20231114

Discussion Paper
How Exposed Are U.S. Banks’ Loan Portfolios to Climate Transition Risks?

Much of the work on climate risk has focused on the physical effects of climate change, with less attention devoted to “transition risks” related to negative economic effects of enacting climate-related policies and phasing out high-emitting technologies. Further, most of the work in this area has measured transition risks using backward-looking metrics, such as carbon emissions, which does not allow us to compare how different policy options will affect the economy. In a recent Staff Report, we capitalize on a new measure to study the extent to which banks’ loan portfolios are exposed ...
Liberty Street Economics , Paper 20230710

Discussion Paper
Small Business Recovery after Natural Disasters

The first post of this series found that small businesses owned by people of color are particularly vulnerable to natural disasters. In this post, we focus on the aftermath of disasters, and examine disparities in the ability of firms to reopen their businesses and access disaster relief. Our results indicate that Black-owned firms are more likely to remain closed for longer periods and face greater difficulties in obtaining the immediate relief needed to cope with a natural disaster.
Liberty Street Economics , Paper 20220906b

Journal Article
Community Effects of Climate Change in North Carolina

According to a 2021 report by the World Meteorological Organization, hurricanes, floods, heat waves, and droughts have increased in frequency and intensity around the world, accounting for 2 million deaths and $3.64 trillion in losses globally between 1970 and 2019. In the mid-Atlantic region, these events typically result in river and coastal flooding; several recent examples have devastated communities.
Econ Focus , Volume 22 , Issue 4Q , Pages 8-11

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