Climate transition risks in Chile’s banking industry: A loan-level stress test

This study provides the first loan-level climate transition risk stress test for Chile’s banking sector, combining granular credit data with NGFS short-term scenarios stemming from a general equilibrium framework. We estimate credit losses under orderly and disorderly transition pathways, integrating sectoral shocks with firm-level probabilities of default and addressing uncertainty through resampling. Results show that despite a gradual decline in exposure to carbon-intensive sectors, bank losses under a disorderly transition could be sizable and rapidly approach levels seen during the Global Financial Crisis, with significant heterogeneity across institutions. These findings highlight the systemic and institution-specific nature of transition risks and underscore the need to embed climate risk into supervisory stress testing and capital planning to safeguard financial stability.