A Framework for Assessing Climate Risk Integration in Banking Capital Models

Thesis Abstract

The increasing recognition of climate change as a critical factor influencing financial stability underscores the urgent need to integrate climate-related risks into banking capital adequacy frameworks. Despite growing awareness among regulators and financial institutions, a standardized and comprehensive model for evaluating climate risk within banking capital models remains underdeveloped, leading to significant vulnerabilities that could undermine financial resilience in the face of escalating climate events. This study aims to develop a robust framework for assessing the integration of climate risk into banking capital models, with specific objectives including identifying existing gaps in current risk assessment practices, evaluating the applicability of advanced analytical techniques for climate risk quantification, and proposing a practical model adaptable across various banking contexts. The research adopts a mixed-methods approach, combining qualitative and quantitative techniques to provide a comprehensive understanding of climate risk integration. The qualitative component involves a thematic analysis of regulatory guidelines, banking policies, and expert interviews to elucidate key dimensions of climate risk and the current limitations in incorporation practices. The quantitative component employs a cross-sectional survey of 150 senior risk managers and chief risk officers across commercial banks within a major financial jurisdiction to gauge current practices and perceptions concerning climate risk modeling. Data collection instruments include semi-structured interviews, structured questionnaires, and documentary analysis of bank risk reports. Validity and reliability are ensured through pilot testing, expert validation, and Cronbach’s alpha assessments. Analytical techniques encompass thematic analysis for qualitative data, and multivariate regression analysis to examine the relationship between existing risk models and climate risk incorporation, as well as factor analysis to identify underlying dimensions influencing integration practices. The study proposes a conceptual framework based on the integration of the Theory of Risk Management and the Climate Change Adaptation Theory, emphasizing the interaction between institutional capabilities, regulatory environment, and climate risk factors. The proposed framework aims to guide banks in systematically assessing and embedding climate-related risks into their capital adequacy processes. It is anticipated that findings will reveal substantial variability in the extent and quality of climate risk integration among banks, influenced by factors such as regulatory mandates, institutional expertise, and available data. The analysis is expected to demonstrate that banks with advanced risk management practices and proactive regulatory engagement are better positioned to incorporate climate risks effectively, leading to more resilient capital models. The results will also highlight specific gaps, including limited use of climate scenario modeling and insufficient quantitative metrics tailored to climate phenomena. This research contributes to existing knowledge by providing a novel, tailored framework that bridges current methodological gaps, integrating climate risk considerations into mainstream banking capital models. It extends the theoretical understanding of risk management in the context of climate change and offers practical guidelines for policymakers and financial institutions seeking to enhance resilience against climate-related financial risks. The study concludes that a standardized, flexible framework is essential for meaningful climate risk integration, which requires capacity building, improved data quality, and regulatory support. Recommendations include the adoption of climate scenario analysis tools, increased investment in training risk personnel, and stronger regulatory incentives to embed climate considerations into capital planning. Future research should explore the application of the proposed framework in different banking jurisdictions and extend inquiry into the quantification of non-financial climate risks, thereby fostering a more sustainable and resilient banking sector globally.