Abstract
Financial industry views climate changes as a black swan event and are hardly accounted for in day to day risk assessments. But climate changes, whether slow and long-acting like global warming or, swift and immediate like tsunami are more common in nature. Inaccurate and incomplete risk models impacts the entire financial industry, be it the primary lender, insurance and reinsurance providers or the securitization products. Financial instruments like weather derivatives, flood insurance and loans for suistainable energy products are on the rise. In this paper, the author presents a risk assessment framework to model and assess climate change risks - for both credit and market risks. This research paper delves on the topic of increase in concentration of greenhouse gases, that in turn causing global warming. It then considers the various scenarios of having the risk drivers impacting credit and market risk of an institution, by understanding the transmission channels. The paper then focuses on the industry that’s fast seeing a disruption: automobile industry. The paper uses the framework to show how climate changes and the change to the relevant policies have impacted the entire financial institution. Appropriate statistical models for forecasting, anomaly detection and scenario modeling are built to demonstrate how the framework can be used by the relevant agencies to understand their financial risks.
Presenters
Mahalakshmi Vivekanandan SStudent, PhD, National Institute of Technology, Tiruchirapalli, India
Details
Presentation Type
Paper Presentation in a Themed Session
Theme
KEYWORDS
Capital Calculation, Climate Risk, Credit Risk, Pillar II Risk
