Financial stability at the ‘Climate Minsky Point’

As central banks – such as the Bank of England, the ECB, and the Bank of Canada – have made progress in integrating climate-related risks into their financial stability assessments, estimating the impact on the financial system is a work in progress.

Financial institutions face extreme uncertainty in their plans to decarbonize their portfolios and evaluate their respective balance-sheet effects. As the Intergovernmental Panel on Climate Change (IPCC) has strongly asserted in its 6th Assessment Report, failure to significantly reduce and possibly eliminate greenhouse gas (GHG) emissions by the middle of the century could lead to dramatically greater risks to humanity and life. Our world.1 At the same time, the war in Ukraine has exacerbated energy security concerns, creating the risk that a transition to renewables could become more costly, complex and cumbersome (IMF 2022c).

This will likely affect the decarbonization plans of many countries who pledged more ambitious climate-reduction mitigation at the COP26 conference in November 2021: once the current crisis is overcome, the world may deviate further from the necessary path to reduce emissions. To meet the goals of the Paris Agreement. To meet the lost time and risk global warming of 1.5 degrees Celsius higher than the pre-industrial average, decarbonization ambitions need to be increased. Financial institutions that lack sufficient ambition in their decarbonization plans at an early stage may find themselves on the wrong footing when the urge to reduce emissions picks up again and leads to an accelerated change away from carbon-intensive investment. This will increase their exposure to physical migration risks, one of the two main forms of climate-related risk (Löyttyniemi 2021).

As part of the IMF’s recent assessment of the state of the UK’s financial stability,2 We conducted an analysis of the risks for UK financial institutions as a result of abrupt changes from business as usual in an ambitious (but ‘chained’) decarbonization scenario, following the logic of the ‘climate Minsky Moment’.3

Climate Minsky moment argument

Focusing on domestic and foreign corporate exposure to banks, insurers and pension funds, the practice emulates individual paths to gross value addition in various industries and countries by 2050, comparatively estimating the ‘flat’ carbon price path (considered ‘business as usual’) and, alternatively, Draw from a steeper and more aggressive transition situation, published by the Network for Greening the Financial System (NGFS 2021). The main idea behind the simulation was, firstly, that the current climate-mitigation pathways are not being factored in most resource assessments aimed at net zero emissions by the middle of the century (as indicated by Riedl 2021); And second, perceptions about the potential for an ambitious decarbonization scenario may change rapidly, leading to a comprehensive reassessment of market asset valuations. The trigger for such a change in perception may be the result of some social or political ‘tipping point’, such as a mounting request for more decisive climate mitigation after the spell of more frequent climate-related extreme weather events. Or, the trigger could be the election results of major countries that suddenly make the path to net zero emissions more credible and unchangeable. This, in turn, could become a turning point for asset valuation, leading to a collapse like Lehman Brothers during the global financial crisis (Steel 2020).

In our analysis, differences between ‘business-as-usual’ and cash flows under transition situations are discounted to estimate the impact on equity valuations (see Figure 1).4

Figure 1 Climate Minsky moment argument

Formula: IMF staff.

The distribution of equity prices across companies shifts to the left due to the decline in overall GDP due to rising carbon prices, while the dispersion increases due to the diverse impact across industries and companies depending on the carbon intensity of their products and manufacturing processes (see Figure 2, right panel).

Figure 2 Climate impact on asset valuation at Minsky Point

Formula: IMF staff.

Changes in the equity price are also converted to changes in the probability of default and the credit spread through a Merton-like model (Merton 1974).

Non-negligible transfer risk

The practice shows that, for banks, the risks of change could translate into the same level of losses as the results of the recent Bank of England Solvency Stress Test and the Climate Binary Exploratory Scenario (CBES) exercise. Our practice estimates a ‘National Determinant Contributions’ (carbon prices will be slightly above $ 150 / tonneCO2 by 2050) to ‘orderly’ transition conditions like ‘Net Zero 2050’ (carbon prices have reached around $ 900 / ton 02020CO2). . The eight largest banks in the UK will face a loss of 3.6% on their corporate loan portfolio, which is related to a credit loss of around £ 79 billion.5 Banks’ losses across all their corporate exposures could exceed £ 90 billion, including market losses on their equity and corporate bond holdings.

Similarly, the total market loss for 14 large insurers could amount to £ 66 billion, or 3.7% of investment assets. The impact could be 11% on their equity portfolio and 4% on their corporate bond holdings. For a sample of about 70 corporate professionally defined benefit schemes (representing one-third of the share in terms of total assets), the weighted average loss will reach about 3.5% of the portfolio value, with individual results ranging from -12.5% ​​to 0%.

Although the overall results do not indicate any impending threat to financial stability, the potential losses are negligible (also considering that they arise only from corporate exposure). The results under a scene marked by a ‘chaotic’ transformation will probably be even more benign.6

The Bank of England’s CBES results, a dedicated visual-based analysis of conversions and physical risks for banks and insurers, lead to similar conclusions.7


Our results inform the rapidly expanding field of scenario-based analysis of climate-related risks. Our practice contributes to some innovative elements, such as the specific features of the ‘Climate Minsky Moment’ and how it combines the very long-term horizons of climate-related risk with the generally short-term horizons for assessing financial stability.

Such scenario-based analysis requires further progress. It should aim to provide a clear indication of the adequacy of financial institutions’ resources to overcome the current large margins of uncertainty in the simulation and to effectively mitigate the risks arising from the ongoing transition to a low-carbon economy.

Author’s note: For full details of the analysis, see IMF (2022b). The opinions expressed herein should not be attributed to the authors and the IMF, its executive board, or its management.


Bank of England (2021), “Stress Testing the UK Banking System: 2021 Solvency Stress Test Results”, 13 December.

Bank of England (2022), “Results of the 2021 Climate Biennial Search Scene (CBES)”, 24 May.

Carney, M (2016), “Solutions to the Climate Paradox”, The Arthur Burns Memorial Lecture, 22 September.

IMF (2022a), “United Kingdom: Financial Sector Assessment Program – Financial System Stability Assessment”, 23 February.

IMF (2022b), “United Kingdom: Financial Sector Assessment Program – Systemic Stress, and Climate-Related Financial Risks: Impact for Balance Sheet Resilience”, 8 April.

IMF (2022c), “Impact of the Financial Stability of the Ukraine War”, Global Financial Stability ReportChapter 1, April.

IPCC (2021), “Summary for Policymakers”, 9 August.

Löyttyniemi, T (2021), “Integrating Climate Change into the Structure of Financial Stability”,, 8 July.

Merton, RC (1974), “On the Pricing of Corporate Dates: The Risk Structure of Interest Rate”, Journal of FinanceMay.

NGFS (2021), “Climate Situation for Central Banks and Supervisors”, June.

Still GS, “Dealing with ‘Climate Lehman Moment’: In the case of macroprudential climate regulation”, Colonel Journal of Law and Public Policy 30 (1).

Woods S, “Climate Capital”, Lecture by Global Association of Risk Professionals, 24 May.


1 As stated in IPCC (2021), “[g]Global warming of 1.5 degrees Celsius and 2 degrees Celsius will be overcome in the 21st century unless there is a profound reduction in CO2 and other greenhouse gas emissions in the coming decades.[p]With each additional increase in global warming, the extreme erosion changes in frequency and intensity increase. ”

2 The IMF conducts periodic assessments as part of its Financial Sector Assessment Program (FSAP). For some systemically important jurisdictions (such as the UK), these assessments are expected to take place every five years. For the original report on the UK Financial Systems Stability Assessment 2022, see IMF (2022a).

3 As stated by Carney (2016), a climate represents a minsky moment “a wholesale reassessment of the possibilities, as climate-related risks are re-evaluated, [that] It could destabilize markets, trigger a pro-cyclic crystallization of losses and lead to continued financial tightening. “

4 Impact on Cash Flow for Larger Companies has been adjusted to include hints from Climate Credit Analytics. / Climate-Credit-Analysis).

5 For comparison, under the Bank of England’s 2021 Solvency Stress Exercise, the same banks bear more than £ 70 billion in credit barriers (in all their debt portfolios, not just corporate) between 2021 and 2022 (Bank of England 2021); And the results of the CBES exercise point to পরিস্থিত 95 billion and (100 billion growing (non-discounted) ‘additional’ losses in corporate lending to corporates from 2020 to 2050 depending on the situation (Bank of England 2022).

6 e.g., NGFS ‘Divergent Net Zero’ scenario (NGFS 2021).

“[B]Based on this practice, the conversion costs to Net Zero appear to be absorbable for banks and insurers, without a worrying direct impact on their well-being. By themselves, this is not the kind of damage that makes me question the stability of the system, and they suggest that the financial sector has the potential to support the economy through change “(Woods 2022).

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