Stay informed of free updates
Central bankers look more like David Cronenberg than on Steven Soderbergh-Ze do not jump around between genres who try to create a quirky feel-good experience, they just adhere to what they know and touch you with repeated waves of existential horror. The newest Summer Blockbuster from the ECB blog is a perfect example – if you take a moment to think about what it says, it will cool your spine.
Here is the Sprongang to end them all:
That orange line is a climate risk scenario, which indicates a recession that would be about twice as bad as the euro crisis, in accordance with the peak-to-trog in 2008-9 and only exceeded by the shock of COVID-19. It is derived from the worldwide scenario of the “disasters and policy stagnation” of the Network for increasing the financial systemwhich is even narrower in total:
Where does the scenario come from? Well, it’s not just the normal “choose a number” exercise that you expect from stress tests in the central bank. The NGFs Maintains three models -A sectoral calculated general balance called Gem-E3, a global macro-financial stock flow consistently called Eirin and a credit risk model called Climacred. They link themselves as shown in the diagram below, and between them they model the effect of shocks on the output, the effect on corporate insoles and the effect of all these factors on global macro variables.
What does this all mean? Let’s be too simple:
As you can see in the above diagram, it is important bit gem-e3. For the technical expression “Chargerable general balance”, you mentally replace “a spreadsheet full of supply chains”. That is not true, but it sets the important intuition fixed-the purpose of Gem-E3 that it models the way in which the different economic sectors feed together, and how a shock for one percoles through the economy. Because the way in which shocking is shared by the economy is partially powered by bankruptcies and partly by financial markets, it needs Eirin and Klimacred to supplement the direct input/output relationships.
The model is about two types of shocks – “transition risk”, where sectors and companies have to change their output plans due to carbon prices and emission rules to achieve the Paris 2050 goals. And “physical risk”, in which sectors and companies have to change their output plans because they are on fire or under water.
Here it is really scary thing – the scenario “disasters and policy stagnation” shown above is a purely physical risk scenario. And it is calibrated to large but certainly not an impossible shock-in fact a year of droughts and forest fires twice a century in 2026, followed by a year of twice-in-a-century storms and floods. If you follow the effects through the sectors, taking into account consumer demand and market reactions, then we would watch a recession of 5 percent in Europe and North America without an important government program, more than that in Asia and much more in emerging markets.
In addition, look at the dates on the horizontal axis and remember that the title of the blog post “is no longer the tragedy of the horizon”. The NGFS Technical Manual makes it clear that there is no feedback from policy or emissions predictions in the physical risk scenarios – this is the 1 percent catarter currico at the moment, and there is nothing that can be done to stop the fire and the flood when it happens.
It is not a puzzle why the ECB publishes these apocalyptic scenarios – they want the banking sector to be prepared Also for them; To have up-to-date flood risk cards and put more capital aside against loans to borrowers that are particularly vulnerable for on weather-based interruption. It is more a puzzle why the Federal Reserve And other American supervisors decided to leave the NGFs at the start of the year. Even if their climate risk policy is “Don’t look at it“They may notice that even if you ignore the fire and the floods, they may not ignore you.
