Ofelia Vietez Hornos
The challenges of climate stress testing (for credit risk)
Climate-related and Environmental Risk (CER) stress testing modelling has its specific set of challenges, no less due to the lack of historical data. Nevertheless, regulators request banks to determine the impact of CER on capital, with increasing demands on robustness and accuracy of calculations. We will provide background information on the concept of CER stress testing for credit risk, current practices, and challenges encountered during the 2022 ECB Climate Stress Test. In particular, we will discuss challenges related to data availability and extensions to other environmental topics, especially in view of their future integration into the climate stress testing framework.