Problem Statement

The client needed to estimate capital shortfall following a climate-related shock, particularly focusing on transition risks arising from policy changes and physical risks arising from property damage.

Solution Approach

Comprehensive Stress Testing

  1. Used key indices to capture the climate risk factor (e.g., XLE and SPY) and market capitalization for the bank.
  2. Measuring the climate risk factor using the above indices and the Transition Risk methodology published by the Federal Reserve.
  3. Estimating time-varying climate beta through a dynamic conditional beta model.
  4. Computing systemic climate risk (CRISK), i.e., expected capital shortfall of the bank in a climate stress scenario.
  5. Comparing results with other Canadian and US banks.
  6. Providing detailed insights into climate-related vulnerabilities.
Client Impact
  • Improved understanding of capital shortfalls under climate stress scenarios.
  • Enhanced risk management and mitigation strategies.
  • Provided actionable data for financial planning and resilience.
Background Gradient
Solytics Partners can help you transform & future-proof your business
Svg Icon
Save time and money with with our suite of accelerated services and advanced analytics solutions
Svg Icon
Stay ahead of the curve in an evolving market, technology, and regulatory landscape
Svg Icon
Leverage our domain knowledge, advanced analytics and cutting edge tech to build your enterprise