The Climate Extended Risk Model (CERM)
Josselin Garnier, Jean-Baptiste Gaudemet, Anne Gruz

TL;DR
The paper introduces the Climate Extended Risk Model (CERM), a framework that integrates physical and transition climate risks into credit risk assessments for bank portfolios, enabling more comprehensive loss estimations.
Contribution
It presents a novel adaptation of existing credit risk models to incorporate climate-related risks, providing a detailed methodology for calculating climate-induced credit losses.
Findings
CERM effectively quantifies climate-related credit risk impacts.
The model allows incremental loss estimation considering physical and transition risks.
It offers a practical approach for banks to integrate climate risk into credit portfolios.
Abstract
This paper addresses estimates of climate risk embedded within a bank credit portfolio. The proposed Climate Extended Risk Model (CERM) adapts well known credit risk models and makes it possible to calculate incremental credit losses on a loan portfolio that are rooted into physical and transition risks. The paper provides detailed description of the model hypotheses and steps.
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Taxonomy
TopicsCredit Risk and Financial Regulations · Insurance and Financial Risk Management · Banking stability, regulation, efficiency
