Incorporating Physical Climate Risks into Credit Risk Models

This research article discusses the integration of physical climate risks into banks' credit risk models, highlighting the need for updated methodologies to assess these risks. It proposes an extension of the Vasicek model to account for physical risks affecting borrowers' solvency and creditworthiness. The paper addresses the challenges faced by banks and regulators in adapting to climate-related financial risks, emphasizing the importance of effective risk management practices in the banking s