Beyond the Dikes: Flood Scenarios for Financial Stability Risk Analysis

Download or read book Beyond the Dikes: Flood Scenarios for Financial Stability Risk Analysis written by Caterina Lepore and published by International Monetary Fund. This book was released on 2024-09-13 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We assess financial stability risks from floods in the Netherlands using a comprehensive set of flood scenarios considering different factors including geographical regions, flood types, climate conditions, return periods, and adaptation. The estimated damage from each flood scenario is used to calibrate the corresponding macro-financial scenario for bank stress tests. Our results show the importance of considering these heterogeneous factors when conducting physical climate risk stress tests, as the impact of floods on bank capital varies significantly by scenario. We find that climate change amplifies the adverse impact on banks’ capital, but stronger flood defenses in the Netherlands can help mitigate some impacts. Further, we find a non-linear relationship between flood damages and banks’ capital depletion, highlighting the importance of considering extreme scenarios.