CRISK Framework: A Novel Approach to Climate Risk Assessment in Banking

At the 2023 MathWorks Finance Conference, Michael Robbins from Columbia University and Arpit Narain from MathWorks delivered a presentation titled "CRISK: Quantifying the Expected Capital Shortfall in a Climate Stress Scenario." The talk highlighted a market-based methodology to assess banks' resilience to climate-related risks.

CRISK Framework: A Novel Approach to Climate Risk Assessment in Banking

The presentation highlighted several key aspects of the CRISK methodology:

  1. Origins and Development of CRISK: Based on research by the Federal Reserve Bank of New York and other academicians, including Nobel Prize winner Bob Engle, CRISK is an advanced tool for assessing climate-related risk exposure in large global banks. This methodology has gained traction, evidenced by its replication by a large Asian central bank for their geographic context.
  2. CRISK Methodology Explained: CRISK is the expected capital shortfall in a climate stress scenario. It introduces climate risk factors and measures banks' stock return sensitivity (climate beta) to these factors. This metric is critical for banks to understand the financial implications of climate risks.
  3. Implementation in MATLAB: The presentation emphasized the role of MATLAB in implementing CRISK, offering a solution for jurisdiction-specific customization and enterprise deployment. The methodology leverages publicly available data, making it broadly accessible.
  4. Implications for Financial Institutions: CRISK's approach to quantifying climate-related risks is crucial for financial institutions to assess their resilience effectively. Providing a tangible measure of potential capital shortfalls in climate stress scenarios enables banks to prepare and adapt more effectively.
  5. Significance and Impact: The CRISK framework is a significant advancement in climate risk assessment, enhancing the financial sector's ability to manage and mitigate the impact of climate change. Its adoption and implementation can lead to more informed decision-making and policy development in the banking sector.

Learn more about the presentation: