A guide to climate transition risk scenario analysis of mortgage portfolios
A guide to climate transition risk scenario analysis of mortgage portfolios
Our research shows that transition risks for mortgage primarily affects collateral value, i.e. loan-to-value (LTV), and are less likely to be the direct root cause of credit losses. Therefore, this guide focusses on assessing impact on risk weights. Our starting point is a risk scenario of increasing CO2 prices, which can represent a range of transition risks.
This can then be transformed into an increase in energy costs, based on the energy composition, which leads to user costs of owning the building based on the energy efficiency. These higher costs will, in turn, affect collateral value, which eventually increases risk weights. As a fifth step, we recommend to consider the robustness of the analysis, as assumptions made along the way will have large impacts on the obtained result.
This document has two tracks. First, we describe the methodology, followed immediately by a hands-on illustration which takes the average EU mortgage portfolio as an example.
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Related work
EU Horizon 2020
Appropriate prudential framework for energy-efficient mortgages
EU Horizon 2020
Prudential treatment of green mortgages: Summary and recommendation
Related Links
A part of the existing Energy Efficient Mortgages Initiative supported by Horizon 2020, the Nordic Energy Efficient Mortgage (NEEM) Hub aims to scale-up lending to energy renovations in the Nordics and will publish a blueprint on how to accomplish this which will be implementable in other regions of Europe and, indeed, the world. In striving to increase energy renovations, the NEEM Hub will help achieve the targets of the European Green Deal and contribute to addressing ambitious national climate targets.