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Physical and transition risk in banking

Understanding the material impacts of physical and transition risk will help banks strengthen their resilience and drive strategic growth. Connecting data on these risks with planning and decision-making tools is key to unlocking new opportunities while managing downside.

Moody’s extensive and trusted data and analytics, industry-leading expertise, and best practices help banks prepare and respond to constantly evolving regulations, as well as customer and shareholder demands across all asset types.

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How we help

We offer workflow solutions, data, and analytics that provide a comprehensive view of physical and transition risks.

Our capabilities integrate these risk analytics into credit models across banking workflows, allowing customers to seamlessly incorporate physical and transition risk into their existing processes for lending, portfolio risk management, stress testing, regulatory reporting, and investment decisions. Customers can access our analytics through standalone physical risk, credit, and economic models, or via our integrated banking workflow platforms.

Solutions

01 Risk
Risk

 

Risks are increasingly complex, interconnected, and hard to predict. We integrate physical and transition risk data and analytics into the credit portfolio management workflow to provide comprehensive insight, a broad perspective for benchmarking, and a connection to the financial implications of these risks on future performance. Our extensive risk intelligence helps banks understand potential risks to their portfolios, meet emerging regulatory requirements, and capitalize on opportunities.
 

Moody’s scenario analysis and stress testing solution leverages our combined expertise to help banks analyze, act, and communicate on physical and transition risks and opportunities within their credit portfolios. Our comprehensive approach leverages advanced modeling, real-world data and extensive coverage of key asset classes, including commercial and industrial as well as commercial real estate, allowing risk and portfolio managers to:

 

  • Obtain a full understanding of physical and transition risks and opportunities:
    • Identify risk concentrations and credit exposures.
    • Assess physical and transition risks.
    • Apply science across all asset classes.
       
  • Compare current conditions against future scenarios to guide portfolio planning:
    • Apply scenario analysis.
    • Conduct scenario analysis and stress testing exercises.
    • Monitor portfolio performance in real time.
    • Leverage what-if analysis for strategic planning.
       
  • Present historical trends and future direction:
    • Comply with regulations and report on risk.

 


By integrating forward-looking metrics into risk management frameworks, banks can enhance their portfolio planning and stress testing capabilities, ensuring they are well-prepared to navigate physical and transition risk complexities.

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02 Lending
Lending

Physical and transition risk requires additional perspectives in the lending process to address key challenges around policy and scenario uncertainty as well as a lack of counterparty data, which can complicate lending workflow activities. Scenario analysis offers a framework to overcome challenges in screening, deal structuring, pricing, and covenant definition and monitoring. The analysis results offer insight on possible economic changes in industries and counterparties. 

We incorporate physical and transition risk data and considerations into our industry-leading credit models, economic research, and forecasts for a consistent, quantitative assessment of credit risk. You can enhance credit assessments with these risks integrated into financial analysis tools, contributing to more informed decision-making. 

We help you navigate the additional element of physical and transition risk within constantly fluctuating financial markets, leveraging our early-warning and monitoring solutions for enhanced operational efficiency, reduced costs, and competitive positioning.  Understand these risks lending implications in your portfolio analysis and stress testing with insights on physical and transition risks to property, market, and submarket metrics that guide your investment strategies. 

03 Finance and risk disclosures
Finance and risk disclosures

In today’s financial sector, the ability to navigate physical and transition risk is paramount. Investors and regulators demand transparency in how banks anticipate and mitigate these risks’ financial impacts. Our integrated finance solutions help banks’ finance departments incorporate advanced scenario analysis and stress testing into their financial planning. This approach can help meet enhanced disclosure requirements and strengthen strategic resilience while maintaining compliance with evolving regulations. By refining key goals and securing necessary capital allocations, banks can safeguard their financial performance against uncertainties, making them more adaptable and forward-thinking in a rapidly changing world.

Moody’s helps risk managers with their portfolio compliance guidelines and net-zero targets as well as identifying adaptation and resilience opportunities, including those specific to the material physical risks identified through our modeling tools.

Regulation and disclosure requirements are rapidly evolving and region-specific. For example, in Europe, executed European Union (EU) banking regulations and European Central Bank (ECB) expectations are creating new challenges and opportunities specific to lending and risk management. Under these increasing worldwide regulatory and market pressures, forward-thinking financial institutions aim to consistently incorporate physical and transition risk into their workflows.

04 Learning solutions
Learning solutions

Physical and transition risk’s impact on banks has caused a seismic shift in how banks confront challenges and opportunities. Banks today have one key differentiator that can give them a competitive edge: their people. Moody's Learning Solutions can help your organization attract, develop, and sustain your next generation of business leaders and help them confidently tackle modern challenges, risks, and opportunities.

Phsyical and transition and sustainable finance Learning Solutions build understanding of risk issues and frameworks, with an emphasis on how to engage stakeholders and businesses on risks and opportunities, helping banks support their clients as they adopt sustainable business practices.

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Replay our latest webinars

webinar
Real-time analytics for banks: Insights from Hurricane Milton and its impact on CRE

Watch as we explore how we model major events, with a special focus on Hurricane Milton. Our experts will reveal impacts on commercial real estate exposures and show how proactive risk management can proof credit portfolios.

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webinar
The financial costs and effects of phsyical risk

Join Moody’s for a virtual round table discussion to explore how modeling the physical risks to your real asset portfolio can help your teams evaluate potential costs from damages and business disruption, plus the implications of changing perceptions on insurability.

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webinar
Explore EU banking regulations and ECB expectations

EU banking regulations and ECB expectations on physical and transition risk are creating new challenges and opportunities in lending. Access an overview of the most recent regulations and guidance, and listen to a discussion on how risk data and modeling offer new insights into regulatory-driven risks and opportunities specific to European banking.

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webinar
Physical and transition risk-proofing your credit portfolio – Why it matters and how to approach it

Join us for an insightful session on incorporating physical and transition risk considerations into credit portfolio management. This webinar offers a practitioner’s perspective, with useful takeaways for managing these risks in your credit portfolio.

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News and views

article

Nov 21, 2024

 Moody's
Moody’s supports OSFI’s SCSE

Physical and transition risk quantification is a fast-developing field. Financial institutions and regulators in many jurisdictions are trying to better understand their exposure to these risks through scenario analysis.

  • Physical and transition risk
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whitepaper

Oct 11, 2024

 Moody's
Physical and transition risk impacts on a lending portfolio; loan-level analytics

The ongoing discussion and analysis of these risks and financial system stability has included a number of risk trials, case studies, and experimental stress tests.

  • Physical and transition risk
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data story

Oct 08, 2024

 Moody's
About 235,000 commercial properties in path of hurricane

As of Oct. 7, Hurricane Milton is forecast to pass over the Tampa Bay area and continue across Central Florida toward the Atlantic Ocean.

  • Physical and transition risk
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data story

Sep 25, 2024

 Moody's
161,849 commercial properties in direct path of hurricane

Hurricane Helene’s projected track across Florida’s panhandle and the South has potential implications for public safety and business continuity.

  • Physical and transition risk
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article
Moody's
Lessons learned in scenario analysis by the Federal Reserve: A pathway to robust modelling of physical and transition risk in credit portfolios

In order to understand and enhance risk management practices in banks, the FRB arranged an exploratory exercise for the loan portfolios of six of the largest US banks.

  • Physical and transition risk
  • Macro economics
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article
Moody's
Physical risk impact on mortgage credit losses—a portfolio example

Mortgage lenders, servicers, and regulators are becoming increasingly aware of the credit risks associated with severe weather events.

  • Physical and transition risk
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whitepaper

Sep 24, 2024

 Moody's
Moody's physical risk capabilities for regulatory compliance

A quick read client use case has been prepared on a recent win with the Bank of Luxembourg (BIL). This use case builds awareness of our capabilities.

  • Physical and transition risk
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Interested in learning more about our offerings? Our solutions specialists are ready to help.