Banking and credit
Banks meet real-economy shocks through their borrowers, their collateral and their own operations. A flood damages the property that secures a mortgage book; a drought cuts the income that services farm loans; an outage interrupts payments and branch services. The Global Risks Alliance (GRA) examines how such shocks move into credit exposures, market disruption and operational continuity, as shared industry questions. It never lends, arranges credit or assesses any bank's own portfolio. See Financial-system risk.
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Exposure aggregation
Banking and credit · Exposure aggregation · Submission 2
Accumulation
circle: aggregated exposure, placeholder
Accumulation by zone
| Coastal zone 1 | 9 | 3 | Cyclone |
| River zone 2 | 6 | 6 | Flood |
| Fault zone 3 | 7 | 2 | Earthquake |
Data quality
GRA · Exposure aggregationExposure aggregation, in outline: domain structure with placeholder names and illustrative values, not a record.
The short answer.
Banking and credit risk from real-economy shocks is the way floods, droughts and outages reach banks through their borrowers, collateral and operations, damaging mortgaged property, cutting the income that services loans and interrupting payments. GRA examines these channels as shared industry questions and takes no lending view.
A loan book under scenario families.
How physical and transition risk could reach a loan book under different scenarios. Illustrative design values.
How shocks reach credit.
| Channel | How the shock reaches finance |
|---|---|
| Collateral damage | Hazards impair the property and assets that secure loans, lowering recovery values |
| Borrower income loss | Interruption, crop failure or job loss reduces the ability to service debt |
| Sector concentration | Lending concentrated in one exposed region or industry fails together |
| Market disruption | Funding and collateral markets tighten when correlated losses appear |
| Operational continuity | Outages at the bank or a shared provider interrupt payments, lending and customer access |
Channels describe mechanisms, not measured strengths or probabilities.
Where climate and operational shocks sit in bank capital.
| Instrument | Status, October 2026 | What it means for credit risk work |
|---|---|---|
| BCBS Principles for the effective management and supervision of climate-related financial risks | Published June 2022; supervisory expectations in many jurisdictions | Climate drivers are assessed through existing credit, market, liquidity and operational risk processes, including concentration and scenario analysis |
| BCBS voluntary climate disclosure framework | Published June 2025; voluntary unless a jurisdiction adopts it | Pillar 3-style templates for physical and transition exposures and financed emissions |
| Basel III final reforms in the EU (CRR3) | Applied from 1 January 2025; market-risk FRTB rules deferred | Revised standardised credit risk and the output floor change how collateral and real-estate exposures weigh in capital |
| UK Basel 3.1 (PRA PS1/26) | Takes effect 1 January 2027; FRTB internal models from 1 January 2028 | Real-estate risk weights and valuation rules that interact with flood-exposed collateral |
| US Basel III re-proposal | Proposed March 2026; comment period closed June 2026; not final | Capital treatment for the largest US banks remains open and is not described here as adopted |
Geocoding a loan book against hazard.
Physical risk in credit starts with the address. Mortgage and corporate loans are geocoded to the collateral or the operating site, joined to hazard layers at return periods such as 1-in-100 flood depth, and passed through depth-damage or wind-fragility curves to an expected change in collateral value. Loan-to-value and probability-of-default overlays then show where a credit migration would concentrate. Insurance cover on the collateral is carried as its own layer, because withdrawal of cover can move a loan before any hazard arrives.
Values shown in GRA figures are illustrative design values. The method, the data owners and the limits of each layer are set out at GCRI scenario and stress testing; banking community work continues at Banking Nexus.
Shared questions GRA works on.
- 01
Credit migration after hazards
How, and how quickly, do physical shocks show up in loan performance, and what data would show it earlier?
- 02
Geography of exposure
Which loan books share the same basins, coasts or power networks, without exchanging any firm's portfolio?
- 03
Insurance and credit together
What happens to credit when insurance cover for the collateral is withdrawn or unaffordable?
- 04
Continuity dependencies
Which third parties would interrupt several banks' services at once?
Shared evidence, never a lending view.
- GRA does not lend, arrange, negotiate or commit credit, and recommends no lender.
- It does not assess any bank's portfolio, capital or creditworthiness.
- Competing banks never exchange prices, rates, lending terms or customer information in GRA work; data is aggregated so that no firm can be identified.
- Related readiness work: Scenarios and stress testing.
The same subject across the Consortium.
Risk management
Risk methods from The Global Centre for Risk and Innovation (GCRI): Risk Management.
Capital dialogue
Dialogue on capital and finance convened by The Global Risks Forum (GRF): Capital Nexus.
Terms used on this page.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| Probability of default | The likelihood that a borrower defaults within a period, usually one year. |
| Loss given default | The share of an exposure lost if the borrower defaults, after recoveries. |
| Collateral feedback loop | Forced selling to meet margin calls that pushes prices further and triggers more calls. |
| Physical risk | Financial risk from climate hazards, both acute events and chronic shifts, that damage assets and disrupt activity. |
Where this page's references lead.
The bodies and documents this page is read against. Status and editions change; each link goes to the issuing body.
- BCBS Principles for the effective management and supervision of climate-related financial risks (2022)
- BCBS voluntary framework for disclosure of climate-related financial risks (June 2025)
- Basel Framework (consolidated standards)
- PRA PS1/26 Basel 3.1 final rules (effective 1 January 2027; FRTB internal models 1 January 2028)
- US agencies' Basel III re-proposal, March 2026 (comment period closed 18 June 2026; not final)
Questions and answers.
Can GRA help our bank assess its climate exposure?
Is this work related to supervisory stress tests?
Can banks discuss lending policy in GRA working groups?
Around GRA.
Start with an enquiry.
The current service level is R0: information and enquiries. An enquiry receives a reference and names the next step; applications, payments, compute allocations and registrations open only when their team, terms and review capacity exist.