EU Horizon 2020

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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