A Biodiversity Stress Test of the Financial System

Abstract: This paper provides the first rigorous assessment of the financial sectors’ resilience to biodiversity transition risk. We provide "bottom-up" stress tests using comprehensive euro-area credit registry data and a market-based "top-down" stress test based on banks' stock return sensitivities to biodiversity risk. Industries exposed to biodiversity transition risk account for approximately 15% of total bank credit to non-financial firms, compared to about 25% for climate-exposed industries. Stress test scenarios indicate that even under severe conditions, additional losses in biodiversity-exposed industries would constitute only 0.3 to 0.5% of the financial system's corporate loan portfolio. A top-down market-based approach yields similar results with capital shortfalls following a biodiversity shock peaking at 0.5% of banks' market capitalization. These results suggest that biodiversity transition risks currently pose only a moderate threat to financial stability.