Banks as the main payers of climate risk

What it is about

Jorge Ambram, Executive President of the Latin American Institute of Financial Risks, presented at the Fourth Annual Risk Conference (September 18, 2026) why climate risk already affects bank solvency and how to measure and cover it. The presentation relies on his own estimates and on scenarios from bodies such as the NGFS.

The 45 slides separate physical risk (droughts, fires, floods) from transition risk, set out the measurement of debtors, issuers and institutions under the IFRS S2 standard and show a referential Dominican portfolio by sector. They then analyze losses and their coverage with the highest-quality capital (CET1), the effect on the probability of default (PD) and the loss given default (LGD), a climate PD calculation with a logistic function, the risks of a disorderly decarbonization and stranded assets, bank mitigants and the challenge of El Niño 2026 and 2027 for Dominican banking.

Objectives

• Show why measuring the climate risk of debtors is the pillar of its management.
• Present how climate risk translates into PD, LGD, expected losses and capital erosion.
• Propose mitigants and recommendations for the risk areas.

Key takeaways

1. The two drivers of climate risk are physical (drought, fires and floods) and transition (adjustment to regulations and policies).
2. The CET1 ratio falls through two channels: a smaller numerator because of losses and a larger denominator because of higher risk-weighted assets; it is better to show them separately.
3. According to the presentation, climate losses observed between 2021 and 2025 in Central America split into 90% physical and 10% transition (conservative scenario, IDB and ECLAC).
4. Climate PD is calculated with a logistic function: start from the 12-month base PD, add the physical and transition adjustments on the logit scale and convert back to PD.
5. Recommendations include integrating transition variables and physical events into PD and LGD models, running stress tests and adopting the IFRS S2 standard.