Establishing a climate stress testing framework in banks
By Kamuran Emre Erkan, Quantitative Consultant, and Svetlana Borovkova, Head of Quant Modelling, both at Probability & Partners
At Probability & Partners, we have recently started developing a climate risk stress testing framework for banks.
With the focus on mortgage portfolios, we also implemented the framework for sectoral portfolios with distinct collaterals, like data centres or moveable assets. The data, scenarios and the methodology to build the framework thus needed to be different for every portfolio. What were some of the main data issues and methodological challenges we encountered during this initiative?
Data issues
A primary issue we encountered was sourcing publicly available data from entities like Klimaateffectatlas (for physical risk maps), Startanalyse (for transition costs) and NGFS (for emissions, electricity prices and the electricity use amounts).
One important problem was the underestimation of the required time to collect the data. Most of the publicly available data is collected through contacting the data providers via email: that response time might take longer than expected.
