Fathom’s Post

Relevance of 'Climate Risk' in the context of 'Banking' -----------------------------‐--------------------------------------------- Climate risks are highly relevant in banking due to their potential impact on: 1. Creditworthiness: Borrowers' ability to repay loans may be affected by climate-related events or transitions. 2. Asset values: Collateral values may decline due to physical climate risks or transition risks. 3. Loan portfolios: Concentrated exposure to climate-vulnerable industries or regions can increase risk. 4. Risk management: Banks must assess and manage climate-related risks in their lending and investment activities. 5. Regulatory capital: Climate risks may impact capital requirements and banks' ability to meet them. 6. Reputation and brand: Banks' climate risk management practices can affect their reputation and brand. 7. Financial stability: Climate risks can pose systemic risks to the financial sector and economy. 8. Disclosure and reporting: Banks are increasingly required to disclose climate-related financial risks and opportunities. 9. Investment and lending opportunities: Banks can support climate-related investments and loans, driving growth and sustainability. 10. Compliance with regulations: Banks must comply with emerging climate-related regulations and guidelines. By understanding and managing climate risks, banks can enhance risk management, support sustainable growth, and contribute to a resilient financial system. #banking #climaterisk #Risk #riskmanagement #bankingandfinance #financialservices #climateriskmanagement

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 Federal Reserve required several large banks to conduct a pilot climate scenario exercise in September 2022. The Fed followed up in January 2023 with definitions of various physical and transition risk scenarios for each bank to run. A new BPI analysis reviews these recently released results and explains what they mean for bank risk management and the safety of the financial system. Read Gregory Hopper’s analysis that finds climate scenarios cannot create risks of sufficient magnitude that affect all asset classes simultaneously: https://lnkd.in/ec5aXK7Z #climatestresstest #stresstests #bankcapital

#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

It is becoming increasingly important for banks to understand and assess the impact of climate risk on their lending book, including the impact on their credit losses and as a result the adequacy of their credit provisions. Given the number of areas to consider in the context of Expected Credit Losses (‘ECL’) (e.g. impact on credit ratings, macroeconomic scenarios, asset valuations, etc.), investing in this area now would be a ‘no-regrets’ exercise, providing value to broader critical processes of banks (e.g. operations including business continuity planning). In this article we highlight key considerations for banks to factor in when incorporating climate risk into their ECL processes, models and estimates. The three key questions for banks to consider are: 1) What segments of their book will be most significantly impacted and require more accurate modelling? 2) When will the impact of climate risk be realised? 3) What is a cost effective solution to integrate climate risk into existing credit risk modelling? In answering the above, we have also provided some thoughts around an organisations' broader data strategy, loan origination process, stress testing process, reporting, and the need to educate and upskill board members.. Read more here. https://lnkd.in/dvVC25yv #PwCAustralia #ClimateRiskModelling Charlotte Boulogne Nina Larkin Nitthila Prathapar Samuel Bray

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

A Challenge for Major Banks The financial sector is waking up to the reality of climate change, and major banks are no exception. A recent article on EENews highlights the struggles of these institutions in assessing their climate risk. A survey of 15 major banks revealed that they are grappling with how to measure and manage climate-related risks. This includes physical risks such as natural disasters and transition risks associated with the shift to a low-carbon economy. The banks cited lack of data, limited expertise, and inconsistent methodologies as major hurdles. Why Climate Risk Matters Assessing climate risk is crucial for banks to understand their exposure to potential losses and opportunities. It enables them to make informed decisions about lending, investing, and risk management. Moreover, it helps them to play a critical role in supporting the transition to a sustainable economy. To overcome these challenges, banks must invest in data collection, develop new expertise, and collaborate on standardizing methodologies. Regulators and industry associations can also provide guidance and support. Additionally, banks can leverage innovative solutions such as climate risk modeling tools and scenario analysis to better understand potential risks and opportunities. #climaterisk #sustainablefinance #banking #ESG

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

US regulator reports banks need to improve climate risk management, sources say A top U.S. banking regulator has determined that major lenders are in the early stages of assessing and managing climate change risks, with substantial progress still required in certain areas, according to sources familiar with the matter. The Office of the Comptroller of the Currency (OCC) conducted a review last year involving 22 large banks to assess how they are incorporating the impacts of climate change into their loan portfolios and overall business strategies. In a recent letter to bank CEOs, the OCC reported that while all banks have undertaken some level of risk identification, their approaches and stages of development vary significantly. The letter, which has not been publicly disclosed, highlights the regulatory concerns about many banks' preparedness to manage climate-related risks. The OCC found that most banks are still in the initial stages of integrating climate risk into strategic and operational planning, internal audits, and risk appetite assessments. Several banks have not yet begun climate scenario analysis, and significant work remains to implement governance frameworks around climate risk. An OCC spokesperson declined to comment on supervisory activities. Globally, banks and regulators are increasingly focused on the financial implications of climate change, although some industry executives question whether climate change poses an immediate threat to bank stability comparable to economic downturns. #BankingRegulation #ClimateRisk #OCC #FinancialStability #RiskManagement #SustainableFinance #BankingIndustry #ClimateChange #Governance #FinancialRegulation https://lnkd.in/gDg_Y83s

RBI takes cognizance of Climate-related financial risk: New guidance notes to be released: The Reserve Bank of India is introducing new guidelines to help financial institutions manage climate-related risks through scenario analysis and stress testing. These standards aim to strengthen the sector's resilience against climate change and align with global best practices in financial risk management. Read more at: https://lnkd.in/gr9-sDck The Hindu #Skymet #RBI #Banking #Climatechange #Climatefinance #Climateaction #Climateresilience #Finance #ClimateRisk