Climate risk and capital requirements – findings for the Polish banking sector based on empirical research

Abstract

This article addresses the consequences for Polish commercial banks of modifying capital requirements by adding an environmental factor. Applying a simulation method, CRISK and MCRISK estimation, and a linear ordering method, the following conclusions were drawn: (i) while it is reasonable to consider the way(s) in which climate risk may impact credit, market and operational risks in scenario analyses, the lack of reliable historical data makes any calibration of GSF and BPF very difficult; (ii) simulating the implementation of adjustments to the calculation of capital adequacy ratios by GSF and BPF should not significantly lower the Tier 1 ratio for the largest banks; (iii) large retail banks are characterised by relatively high rankings reflecting a combination of financial characteristics (financial performance) and environmental (taxonomy) disclosures; and (iv) climate risk does not currently (2023) pose an immediate threat to the Polish banking sector, although the risk of climate transformation is a factor of significant importance.

Keywords

• bank
• linear ordering
• capital adequacy
• banking sector
• climate risk