Michel Alexandre de Silva (Central Bank of Brazil)

Informal meetings on complexity field

The impact of climate transition risks on the Brazilian financial sector

Abstract: In this talk, we aim to present a methodology for computing the impacts of climate-related transition risks on the financial system. First, we consider a shock to the mining fossil extraction sector due to adjustments to lower carbon technology. This could lead to a reduction in the supply of inputs to (Gosh approach) as well as in the demand for inputs from other economic sectors (Leontief approach). As a result, the different economic sectors will lose a fraction of their stocks of physical capital. Firms belonging to these economic sectors will partially default on their debt obligations, generating losses for the banks that have lent to them. Finally, this direct loss will spread through the interbank market, giving rise to indirect losses. Applying this methodology to a broad Brazilian dataset, we show that the exposure of the Brazilian financial system to climate-related transition risks (considering potential direct and indirect losses) has decreased in recent years, although this exposure is heterogeneous across financial institutions.

Joint work with A. Scala (IUSS Pavia), A. Caiani (IUSS Pavia), and G. Lima (U. of São Paulo)