<![CDATA[This study aims to analyze the relationship between water scarcity risk, banking financial stability, and industrial asset valuation, while developing a framework for integrating water risk into the climate stress test (CST) as part of a green economy policy direction. The study employs a quantitative approach with an explanatory research design using panel data covering the period 2010–2023 in East Java Province. The research objects consist of 8 commercial banks and 75 manufacturing companies. Data analysis was conducted through descriptive statistics and ADF-PP stationarity tests, the Johansen cointegration test, copula modeling, water price forecasting using Long Short-Term Memory (LSTM), Vector Error Correction Model (VECM), Impulse Response Function (IRF), and risk-adjusted Discounted Cash Flow (DCF) valuation. The results indicate a significant positive relationship between SRI and water prices, with a correlation coefficient of 0.672 based on the Gaussian Copula. The LSTM model demonstrates good predictive performance, achieving a KGE value of 0.84 on the testing data. The VECM results show that changes in SRI and water prices significantly affect banking NPLs, while the Error Correction Term of -0.412 indicates an adjustment mechanism toward long-run equilibrium. The risk-adjusted DCF valuation further reveals that water scarcity can significantly reduce firm value, with an average decline of 21.1% and a reduction of up to 55.8% among firms facing high water risk. These findings confirm that water scarcity represents a material financial risk that should be integrated into banking risk management, CST, and industrial asset valuation. Such integration can strengthen financial sector resilience while supporting the transition toward a green economy and sustainable development.]]>
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