![]() ![]() Recent Findings in Relation to Physical RisksĪ staff study by the New York Fed released in January 2022 titled, “How Bad Are Weather Disasters for Banks?”, evaluated how banks fared in response to FEMA-level climate disasters in 1995-2018. As outlined in the recent research analysis and scenario analysis outputs, which are discussed in further detail below, this level of regulatory focus and requirements would seem to be disproportionate to the risk that climate may pose to large banks. Currently, climate scenario analysis exercises are being run or have been completed in over 25 jurisdictions. At the same time that risk management principles are being developed by regulators and international bodies, scenario analysis exercises are proliferating. For example, this past year we have seen two consultations from the OCC and FDIC on climate risk management the finalization of the Basel Committee’s climate risk management principles a consultation from the FSB on climate risk management and European regulators continue to push for more granular assessments and integration of climate-related risks into the individual capital adequacy assessment process (ICAAP). Notably, in the May 2022 Financial Stability Report published by the Federal Reserve climate fell off the list of most cited risks for the next 12-18 months, whereas climate ranked 6 th in near-term risks in the 2021 Financial Stability Report.ĭespite the emerging evidence that suggests banks are well-placed to manage climate-related financial risks whether they are generated by physical risk events or through transition-related events, regulators continue to push a plethora of very detailed and intensive requirements on banks-and large banks in particular. This is not to say that climate events or changes in policy to mitigate climate change will not have an impact on banks’ balance sheets and will not need to be understood and managed, but rather that they may not rise to the level of systemic risks or material safety and soundness risks. This of course would all be appropriate if climate-related financial risk is a financial stability risk or material bank safety and soundness risk however, over the past year the results of more research and practical analysis undertaken through climate scenario analysis calls into question whether such risks are material and in fact suggests that the near-term risks are entirely manageable for large banks. These official sector efforts have resulted in a myriad of climate risk management proposals by supervisors, numerous climate scenario analysis exercises and a host of disclosure requirements across jurisdictions. The work has been further formalized through the Financial Stability Board’s Climate Roadmap, which lays out the G20 commitments and deliverables in relation to climate-related financial disclosures, monitoring and measuring climate-related risks, the development of scenario analysis and supervisory tools and practices in relation to climate risk management for financial institutions. This work has largely been organized through the Network for Greening the Financial System (NGFS), which is made up of central banks and supervisors. ![]() Over the past several years, central banks and supervisors have been evaluating climate-related financial risks to banks focusing on physical and transition risks. The risk of climate change to the planet and the changes that will ensue in the global economy either through a transition to an economy that is less reliant on fossil fuels or, if no transition takes place, the losses that will be born through increased physical climate events, may not, however, lead to financial stability risk at the macro-prudential level or safety and soundness risk at the micro-prudential level for banks. In response to this, banks have worked diligently to meet regulators’ risk management demands and many banks and end users have made commitments to achieving “net zero” in line with the Paris Agreement by 2050. As part of the solution to limit global warming, banks have been called upon to build out their climate risk management capabilities and work to align greenhouse gas emissions in their lending and investment portfolios in line with the Paris Agreement. ![]() Over the past several years there has been an increased focus from regulators, policymakers and academics regarding the role that climate change may play in generating financial risk within the financial system. ![]()
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