Crisk-X and Grisk-X : Quantification and Attribution of Climate and Geopolitical Tail Risk for the Eurozone Banking Sector

This work aims to quantify climate and geopolitical tail risks for a representative sample of Eurozone publicly traded banks. By expanding on the method proposed by Acharya et al. (2012) to measure systemic risk (SRISK), we introduce two market-based metrics, climatic risk (CRISK-X) and geopolitical risk (GRISK-X), to measure the potential equity deficit associated to the excess on SRISK due to the simultaneous occurrence of both climatic and geopolitical crises. Maximum risk is computed using multivariate GARCH (DCC) and Monte Carlo simulations applied to a suite of Eurozone-specific factors, whereas CRISK-X and GRISK-X attribution is carried out with a frequency-based risk method. We find that CRISK-X more than doubled between 2011 and 2022, adding on average 13% to standard SRISK: potential climate-related losses are hence likely to exceed the European Central Bank €70 billion stress test estimate. GRISK-X surged to over 5% of maximum combined risk and shows higher persistence than in the past