Assessing climate risks in Uruguay’s banks using NGFS short-term scenarios

The agricultural sector is a key driver of the Uruguayan economy, making it particularly vulnerable to hydrometeorological events. This paper assesses the impact of severe physical risk events — combining droughts, heatwaves, and wildfires — on the capital position of Uruguayan banks, using the NGFS short-term scenarios and the CLIMACRED-PHYS model. We estimate the impact of adjustments in the probability of default at the sector level on expected losses and evaluate what share of banks’ regulatory capital these losses represent. Our results indicate that most banks are affected under the NGFS scenarios, with approximately half experiencing incremental expected losses exceeding 20% of their capital. These findings contribute to the understanding of the financial sector’s exposure to climate risks and underscore the importance of incorporating physical risk factors into banking stress tests.