International Journal of Financial Innovations & Risk Management
2025 – Volume 1 – Issue 1 – Pages 81–107
Authors:
Imran Hussain Shah 1, Shahid Khan 2,
1. University of Lahore, Lahore, Pakistan
2. University of Lahore, Lahore, Pakistan
Abstract
The COVID-19 pandemic exposed structural fragilities within global banking systems, while the accelerating climate transition has intensified long-horizon financial risks. These two systemic shocks—acute pandemic disruptions and chronic climate exposures—interact in complex, nonlinear ways that traditional macroprudential tools fail to capture. This study develops a comprehensive post-COVID macroprudential framework for climate risk stress testing in the banking sector, integrating real data from 2019–2025 for major European and U.S. institutions. A seven-model analytical architecture—comprising NGFS climate scenarios, Dynamic Stochastic General Equilibrium (DSGE) simulation, System-GMM, Panel VAR, Credit Portfolio Models, Climate Value-at-Risk, and Network Contagion modelling—is employed to quantify dual-shock impacts on credit risk, capital adequacy, and systemic interconnectedness. Results show that post-pandemic provisioning shocks and carbon-intensive loan exposures significantly amplify non-performing loans (NPLs) and erode Common Equity Tier 1 (CET1) buffers, especially among European banks. Further evidence indicates that climate transition risks are increasingly shaping credit quality and capital behaviour in the post-COVID era. The study offers a policy-aligned stress-testing framework that guides supervisory calibration, capital buffer design, and a climate-aligned macroprudential strategy. The findings underscore the need to integrate dual risks for financial stability in a converging climate-pandemic risk environment.
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