Climate risk stress testing model: impacts on the Peruvian financial system and integration with solvency stress testing

What it is about

Juan Carlos Salinas Morris, senior economist in Economic Studies at Peru's SBS, presented at the Third Annual Risk Conference (September 2025) the SBS climate risk stress testing model and its integration with solvency stress tests. The slides are in English.

The 19 slides present the SBS framework, the sources of historical information (georeferenced rainfall) and projection scenarios (CMIP6, IPCC and NGFS), the methodology, the main results on probability of default, loss severity on residential real estate and provisions, and the improvement of the climate module of the solvency test with coastal El Niño scenarios.

Objectives

• Explain how climate risk drivers are transmitted to financial risks.
• Describe the methodology and data sources of the SBS model.
• Show the results and how climate risk is integrated into the solvency stress test.

Key takeaways

1. The model starts from the climate risk transmission channels described by the Basel Committee and evolved from the first version of its climate module in 2015-2016.
2. It uses historical rainfall data (obtained from georeferenced information) and projections of climate and macroeconomic scenarios from CMIP6, the IPCC and the NGFS network.
3. Extreme precipitation events (heavy rains and droughts) increase the probability of default differently depending on economic activity.
4. Heavy rains raise loss severity on residential mortgage loans.
5. The results translate into higher loan loss provisions, measured as a percentage of risk-weighted assets, and are integrated into the solvency test with coastal El Niño scenarios.