Italy: Financial Sector Assessment Program-Technical Note on Climate Physical Risk Analysis

This paper examines a Technical Note on Climate Physical Risk Analysis for the Italy Financial Sector Assessment Program. Italy is highly exposed to climate‑related physical risks, particularly floods. At the micro level, flood damages to residential real estate are mapped to banks’ mortgage portfolios through changes in loss‑given‑default (LGD). Results indicate that the direct impact of severe floods on mortgages’ LGDs is generally modest, reflecting relatively low loan‑to‑value ratios and limited average damage rates. At the macro level, the analysis captures some indirect effects through flood‑induced capital destruction, production losses, and public support measures. Overall, the banking system appears broadly resilient to the severe flood scenarios considered. A sensitivity analysis of post‑disaster government support highlights important trade‑offs for financial stability. These findings point to several priorities to strengthen climate physical risk analysis. Enhancing data availability is critical to improving the assessment of physical climate risks. Continued development of physical risk stress testing frameworks, stronger collaboration between financial authorities and natural hazards experts and climate scientists, and closer coordination between banking and insurance supervisors are also essential.