Climate-related stress tests for banks must better capture the indirect effects of climate change on lenders and the global economy, according to the G20 Financial Stability Board on Tuesday.
The European Central Bank, the Bank of England, and other central banks have completed the first round of experimental stress tests to assess how banks will deal with the effects of climate change on their operations.
The findings were not used to calculate capital levels.
In a joint report with the Network for Greening the Financial System, a group of central banks whose work shaped the initial climate test scenarios, the FSB stated that the initial exercises were limited to the domestic impact.
"In addition, measures of exposure and vulnerability are likely understated," the report said.
The report, echoing industry officials, stated that many of the tests do not capture'second round' effects, or the impact on banks of climate change on the overall economy.
The tests also did not fully capture potentially large sources of risk, such as those resulting from a sharp drop in asset prices on bank balance sheets.
Data gaps must be filled, and more cross-border action is required, according to the report.
"A key priority going forward will be to enhance the understanding of how first-round and second-round effects under different scenarios could give rise to financial stability concerns," Klaas Knot, chair of the FSB and the Dutch central bank, said in a statement.
The European Central Bank stated earlier this month that eurozone lenders were still failing to meet its climate disclosure and management expectations.
In July, the Bank of England stated that future climate-related stress tests could concentrate on specific activities at banks, such as trading, which was absent from the first test.
(Source:www.reuters.com)
The European Central Bank, the Bank of England, and other central banks have completed the first round of experimental stress tests to assess how banks will deal with the effects of climate change on their operations.
The findings were not used to calculate capital levels.
In a joint report with the Network for Greening the Financial System, a group of central banks whose work shaped the initial climate test scenarios, the FSB stated that the initial exercises were limited to the domestic impact.
"In addition, measures of exposure and vulnerability are likely understated," the report said.
The report, echoing industry officials, stated that many of the tests do not capture'second round' effects, or the impact on banks of climate change on the overall economy.
The tests also did not fully capture potentially large sources of risk, such as those resulting from a sharp drop in asset prices on bank balance sheets.
Data gaps must be filled, and more cross-border action is required, according to the report.
"A key priority going forward will be to enhance the understanding of how first-round and second-round effects under different scenarios could give rise to financial stability concerns," Klaas Knot, chair of the FSB and the Dutch central bank, said in a statement.
The European Central Bank stated earlier this month that eurozone lenders were still failing to meet its climate disclosure and management expectations.
In July, the Bank of England stated that future climate-related stress tests could concentrate on specific activities at banks, such as trading, which was absent from the first test.
(Source:www.reuters.com)
