Does Climate Transition Risk Undermine Banks' Loan Portfolio? Evidence from Bank Supervisory Micro Dataset

We use a unique micro dataset on households and non-financial corporations to assess the impact of climate transition risks on banks’ loan portfolios. We estimate this effect by incorporating scenarios and macroeconomic projections from the Network for Greening the Financial System into the central bank’s risk assessment framework. We find that a smooth transition away from emission-intensive sectors results in minimal credit losses for banks. In contrast, an uneven transition can lead to significantly higher losses, sometimes exceeding those from worst-case non-climate scenarios. The results are sensitive to rising energy prices and increased default rates in emission-intensive sectors. These findings provide valuable insights for small, open, and emission-intensive economies with bank-based financial sectors, such as Slovakia.