Climate Risk Stress Testing for the Banking Industry: From the Perspective of Industry-Emdodied Carbon Costs

Global climate change is increasingly a central driver of systemic financial risk as climate risks are transmitted across the board through the real economy to the financial system. Power price market reform driven by power generation side carbon costs through the price transmission chain to industry, transportation and other related industries, resulting in financial institutions climate exposure continues to expand, exacerbate the cumulative effect of financial industry systemic risks under climate risk shocks. This study focuses on the impact of the industry"s embodied carbon costs on systemic risks in the banking sector under climate risk shocks. The potential impact of climate risk on the stability of the financial system is systematically portrayed by jointly constructing the Input-Output Price Conduction Model and the Morton Model of Climate Loss to assess the loss of industry debt value due to embodied carbon costs, and finally based on the discount selling mechanism of climate exposure assets. It is found that the power industry has significant climate risk conduction effect on other industries, and asset selling is the key incentive of financial systemic risk amplification under climate risk shocks. The purpose of this study is to provide a theoretical basis for the design of synergistic mechanisms for climate policy and financial risk prevention and control, and to contribute to the construction of the financial system stability framework under the "bi-carbon" objective of our country.