Bank Policy Institute’s Post

Extremely informative article by Louie Woodall on Unpacking Climate Risk. Looks at the deliberations of the BCBS to determine the guidelines for bank supervision around the world. He discussed the opposition offered by the key U.S. regulators, and I must say I'm on their side. There has to be a significant possibility that climate risk can already be handled by existing regulatory processes. Moves by international regulators were not made in response to a crisis, and if climate risk is truly a threat, small undiversified banks will fall before the systemically important banks. Bear in mind that the supervisory bible is concerned with bank safety, not saving the planet from climate change. These are very different aims, the precautionary principle does not apply to bank safety. These are my quick thoughts, Louie's are far more thorough and considered. #climaterisk https://lnkd.in/eV8sjcR3

The ECB's tough stance on climate and nature-related risk management 💼🌍 Earlier this year, the European Central Bank stated that it was considering imposing daily penalties on banks that fail to properly identify and manage climate and environmental risks. These penalties would mark the first use of such enforcement measures, highlighting the ECB's growing impatience with inadequate risk management. In September, as per Reuters, the ECB started issuing fine notices to banks that did not meet its expectations on disclosing and managing climate risks and environmental risks. The ECB's approach is designed to compel banks to manage material financial risks effectively and reflects a broader trend towards stricter enforcement of climate-related financial regulations. While the banking industry acknowledges the importance of environmental risk management, there are concerns about the proportionality and clarity of these potential penalties ⚖️ https://lnkd.in/eWMiGHUf #ECB #SustainableFinance #Banking #ClimateRisks #EnvironmentalRisks #ESG #EUFinance  

Banks are increasingly recognizing the importance of integrating climate risk into their investment processes. Yet, the lack of reliable data hinders effective risk assessment of both physical and transition risks. Despite underestimation, addressing these risks is crucial to avoid loan losses. In this commentary, produced in collaboration with IFI Global, we explore why it is more important than ever to incorporate climate risk and where banks can start in their measurement. Read more on our website: https://hubs.ly/Q02GxwKr0 #banking #climaterisk #investment #climatedata #transitionrisk

The Fed's read out from their first Climate Scenario Analysis on six of the largest banks was well, not surprising. As I note in the article below, the little secret not too many really know about is that the underlying data and climate models feeding bank financial and risk models are not ready for prime time in use for making hard money decisions and the Fed's report corroborates that view. Despite a lot of advances in the climate models over time, a lot of serious issues remain on them as well as the integrated assessment models (IAMs) used to generate climate scenarios. None of these models at this point would likely pass a Fed SR 11-7 model risk management and validation exam.

Institutions are likely to significantly increase their forward-looking climate risk analysis over the next several years. This will be driven by increasing regulatory and stakeholder pressure, in addition to the continuing manifestation of transition and physical climate risks.  The European Central Bank (ECB) report on the state of climate risk management in the banking sector indicated that the majority of participating banks planned to have climate risk-related stress tests operational within a 1- to 3-year window, as seen below. Almost all banks note a need to improve the climate risk stress-testing framework by either refining data collection from counterparties and/or engaging with environmental, social, and governance data providers. #sustainable #business 

Federal Reserve Board releases findings from Climate Scenario Analysis with major banks 🏦🇺🇸 The Fed has just revealed findings from its pilot CSA with six of the nation's largest banks, aimed at evaluating their climate risk management practices. The physical risk assessment module focused on residential (RRE) and commercial real estate (CRE) loan portfolios only. Key Insights: 🔄 Varied Approaches: banks are using different methods to create scenarios and translate climate risks into quantifiable metrics. Predominantly, they rely on existing credit risk models which may fall short due to the unique, non-linear progression of climate change. 🔍 Data Challenges: data gaps emerged relating to building characteristics, insurance coverage, and overall modeling difficulties. Banks struggle with data availability and a limited understanding of both indirect and chronic impacts of climate risks. 🚧 Governance Hurdles: governance issues were prominent, characterized by insufficient data for back-testing, challenges due to the non-linear nature of risks, extended scenario horizons, a reliance on judgment and limited model output reliability. This pilot highlights the common challenges financial institutions face in climate risk management, such as the lack of data, industry benchmarks or adequate models. It emphasises the urgent need for a collaborative, unified approach to establish consistent practices and industry standards across the sector - in the US and the rest of the world. Full link in the comments 👇 #FederalReserve #ClimateChange #RiskManagement #Banking #finance #Sustainability

#banks #capital #buffers #resilience #Basel #CRR #CRD #BRRD #systemic #climaterisk #scenarios #ECB #macroprudential I want to believe smart risk managers already include these scenarios in their own capital planning and allocation steering, and that banks already include them in finance contracts too. Projecting climate scenarios further on their own loan portfolio, building on the ECB's climate risk stress test they just had to do anyway. Why wouldn't they? European Banking Federation https://lnkd.in/eZaFWz4q

📰 "The Shifting Sands of Risk: Are Banks Prepared for the Unknown?" Some interesting highlights from Deloitte: - Inflation Risk - Climate Change Risk - Data - Regulations #Risk2025 https://buff.ly/49BgIy3

Macroprudential capital buffers are a key instrument to consider for safeguarding the banking sector against systemic risk challenges posed by climate change. Discover this proposed framework by Florian Bartsch, Iulia Busies, Tina Emambakhsh, Michael Grill, Mathieu Simoens, Martina Spaggiari and Fabio Tamburrini (European Central Bank) to calibrate a macroprudential capital buffer for climate purposes ⤵️

How should banks manage climate transition risk? Recent European Central Bank reports highlight the material risks from misalignment with EU climate goals. The challenge with this approach: It assumes that transition risk to a company’s business, and by extension, credit risk to a bank that lends to that company, stems from misalignment with long-term government policy commitments rather than a disconnect with the pace of transition in the real economy. A new BPI note from Gregory Hopper suggests an alternative methodology to measure transition-driven credit risk, involving estimating the transition-related default risk premium. Read it here: https://lnkd.in/eQ42EdJq #climatetransitionrisk