ORCID
Aneta Ptak-Chmielewska 0000-0002-9896-4240
Paweł Kopciuszewski 0009-0001-1130-649X
Alvaro Fernandez Toledo 0009-0001-0715-3654
Keywords
stress tests, climate risk, NGFS data
Abstract
Climate risk is one of the type of risks in a bank’s portfolio which is not fully recognized, and its impact on the future overall risk changes is hidden due to lack of sufficient knowledge at the moment. One of the most common data comes from Network for Greening the Financial System (NGFS) scenarios related to climate change (physical risk) and climate policy and technology trends (transition risk). In the paper we focused on the transition risk scenarios and their impact on the economy and in particular on credit risk. Our main goal was to check the tendency in the probability of default (PD) default prediction in relation to climate risk potential future scenarios. We used data related to credit risk observed in Southern Europe banks for mortgage products for the years 2003–2019. Based on PD models we predicted the changes in the PD parameter over many years ahead by considering the set of scenarios collected in NGFS data. We selected the two scenarios ‘carbon tax revenue from the residential and commercial sector’ and ‘electricity price at the final level in the transportation sector’ for building the final models. From the PD logit model and linear predictors for the PD model we found that the main determinants predicting PD correlating with NGFS scenarios are LTV, customer income, unemployment rate, and crude oil prices. The quality of univariate models is above average, and the quality of the PD model is on an average level. The proposed models can be used in banking as stress tests in climate risk management.
Acknowledgments
Funding
The cost of editing selected articles published in the Journal of Banking and Financial Economics in the 2022– 2024 is covered by funding under the program “Development of Scientific Journals” of the Ministry of Education and Science under agreement No. RCN/SN/0321/2021/1. Task title: “Verification and correction of scientific articles and their abstracts”. Funding value: 21 197,00 PLN; The task consists of professional editing of articles published in English.
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and publication of the article.
Declaration about the scope of AI utilization
The authors did not use an AI tool in the preparation of the article.
Recommended Citation
Ptak-Chmielewska, A., Kopciuszewski, P., & Toledo, A. F. (2024). A Method to Incorporate Transition Risk Stress Testing Into Probability of Default (PD) Models for Retail Portfolios. Journal of Banking and Financial Economics, 2024(1), 42-53. https://doi.org/10.7172/2353-6845.jbfe.2024.1.4
First Page
42
Last Page
53
Page Count
12
Received Date
30.06.2024
Revised Date
30.08.2024
Accept Date
16.09.2024
Online Available Date
04.11.2024
DOI
10.7172/2353-6845.jbfe.2024.1.4
JEL Code
G17, G21
Publisher
University of Warsaw