First Street’s Post

Climate-driven natural disasters are no longer sporadic; they are becoming the new normal, and the trends are quite alarming. The Intergovernmental Panel on Climate Change (IPCC) projects a temperature rise of 2.1°C to 3.6°C by 2050 if current policies persist. This will escalate physical risks, leading to severe economic, social, and environmental consequences. In this scenario, banks have no choice but to upgrade how they manage their portfolio exposures to climate-related physical risks. There are multiple and progressive methodological approaches to quantifying physical risk, with four key building blocks that banks should always consider: exposure, hazards, vulnerability, and economic impact. In this article I had the pleasure of co-authoring with my colleagues Andrea Castoldi, Giovanni Lucini, Bruno Micale, and Amine Benayad, we delve into two next-gen approaches that banks may adopt to assess the impact of physical risks at the portfolio or counterparty level: outside-in or inside-out. Each approach provides unique insights and helps in developing a comprehensive risk management strategy. Learn more about these approaches here: #ClimateRisk #RiskManagement #PhysicalRisk

As I prepare for the upcoming Spring Meetings of the IMF/World Bank this month in Washington, DC, I was pleased to be reminded of the importance of stress testing for climate change by Brian Connor. His April 3rd article in The Regulatory Review from the University of Pennsylvania’s Penn Program on Regulation highlights the findings of Professor Viral V. Acharya, from the New York University Stern School of Business, and several coauthors on designing a stress test for climate risk to inform the impact of climate on financial stability. I will provide a link to the Penn article in the comment section. The longer report below is well worth reviewing, as it will generate important ideas for risk leaders in managing exposures to climate change. Key themes include: credit risk, liquidity risk, physical risk, transition risk, and compliance risk. The report also provides a high-level overview of evolving stress testing scenarios by financial regulators across multiple jurisdictions. Brian J. Connor NYU Stern School of Business Reserve Bank of India (RBI) Federal Reserve Bank of New York The Risk Management Association Global Association of Risk Professionals (GARP) Mark Carey Jo Paisley @Joy Macknight European Central Bank Bank of England #Climatechange #Stresstesting #Climaterisk #bankreg #banking #financialsystems https://lnkd.in/e9B42ky8

It will be interesting to see how the climate risk regulations affecting banks will continue to evolve in different jurisdictions. What seems clear is that climate risk needs to be effectively managed. Therefore quantifying integrated climate risk metrics (i.e. considering transition risk, transition opportunity and physical risk) will be a key challenge. This is one of our key areas of focus at Vyzrd #climaterisk #sustainability #riskmamagement https://lnkd.in/e2j4Uvcm

#SUERFpolicybrief “Designing a macroprudential capital buffer for climate-related risks” by Florian Bartsch (Boston Consulting Group (BCG)), Iulia Busies, Tina Emambakhsh, Michael Grill, Mathieu Simoens, Martina Spaggiari, Fabio Tamburrini (European Central Bank) Climate change poses unprecedented risks to financial stability, requiring new and targeted approaches to mitigate its impact. To this end, our paper explores the design of a macroprudential capital buffer tailored to address climate-related risks, building on granular data and state-of-the-art climate stress testing methods. We first project losses due to climate transition risk by leveraging on the ECB top-down climate stress test. We document a large dispersion of banks’ exposure to transition risk, with the highest losses concentrated in the portfolios of banks characterized by lower excess capital. We then present a calibration methodology for a climate-related systemic risk buffer (SyRB), which enables to tailor bank-specific buffer requirements and to address the build-up of climate-related systemic risks in the banking sector, while limiting adverse impacts on bank lending. The focus of our application lies on transition risks, however, the flexibility of the framework allows to capture all types of climate risks in general and over different time horizons. https://lnkd.in/dviaiCj9 #MacroprudentialPolicy #ClimateChange #TransitionRisk #ClimateRisk

How does climate change impact banks? And how can #banks practically integrate #climate #risk into their risk management frameworks? Climate risks are inherently different in nature to the risks traditionally managed by banks (credit, market, operational). As the climate changes, banks will need to operate amongst increasing uncertainty, balancing their strategic ambitions with prudently managing the risk. This means making climate-risk informed assessments of new loan applications, understanding climate-related risks embedded into the existing lending portfolio, and managing financial resources such as capital resources in the context of climate related risks. Last week Sharanjit Paddam, Senthooran Nagarajan, John Evans and I presented our paper for the Actuaries Institute Summit which addresses these issues, and provides practical guidance for banks to effectively manage the impact of climate risk. Read our paper here: https://lnkd.in/ehjguBEA

The stakes of climate change are high for many industries: physical risks are beginning to materialize, regulatory pressures are increasing, new opportunities are emerging and investors are demanding more transparency. The first step is understanding what exactly is at risk. For banks, one of the biggest threats is credit risk, or the risk that borrowers will default. In home mortgage lending, for example, a bank’s loan portfolio can be impacted by climate risk in two ways either through persistent, chronic changes in the environment such as rising seas or through specific acute events such as more intense storms, flooding and mudslides. Expectations of an increase in such events can hurt property values and ultimately increase the risk of defaults. Banks are under rising regulatory and commercial pressure to protect themselves from the impact of climate change and to align with the global sustainability agenda. Banking regulators around the world, now formalizing new rules for climate-risk management, intend to roll out demanding stress tests in the months ahead. The United Kingdom’s Prudential Regulation Authority was among the first to set out detailed expectations for governance, processes, and risk management. These require banks to identify, measure, quantify, and monitor exposure to climate risk and to ensure that the necessary technology and talent are in place. Banks are urged to ensure sufficient resources are allocated to climate strategy implementation. A comprehensive strategic assessment could benefit from stakeholder engagement to reflect increasing awareness of climate related issues in the community and national and international climate goals. Climate risk management cannot be compartmentalized in one corner of a bank, but rather it is a cross-cutting issue affecting all levels. #climaterisk #esg #banking #environment #climate #riskmanagement

🎓 What skill sets are needed to build a strong climate risk team? 🛣 How useful is historical data in assessing future climate risk? 🤝 What role can partnerships play in supporting banks with their climate risk strategy? We discuss all this and more with Eric Wischman, Climate Risk Officer and Conduct Risk Senior Officer at M&T Bank, for the cover feature of the latest issue of The ONside. Check it out 👇 https://lnkd.in/e5FYkB6T #climate #riskmanagement #commercialbanking

Maybe climate scenarios *are* malarkey? I've been a proponent of climate scenario analysis (CSA) for years as a risk management tool, but even my faith has been rattled by two papers published this week by the Bank of England and Basel Committee on Banking Supervision. These seem to admit that current macro-climate scenarios aren't useful from a financial risk analysis standpoint, and need "extending" or add-ons if they are to provide helpful insights. Is this a damning indictment of the current state of CSA? Do we need to go back to the drawing board? Or is this a healthy reassessment we should take confidence in? Read the full article by becoming a 'Unpacking Climate Risk' subscriber, and share your thoughts below! https://lnkd.in/etQHci9t #climaterisk #climatescenarios #NGFS #ESG #riskmanagement #sustainability

Bank Policy Institute blog cautions against climate risk-related regulations Arguing that the effects of climate change likely pose only “very small” risks to the operation of banks, Greg Hooper, a senior fellow at the Bank Policy Institute, suggested in a blog post that it would be “unwise by any cost-benefit analysis” to impose “onerous” climate change reporting requirements about operational risks on banks. “Climate change creates an important new set of risks for banks to measure and manage, but, like any other risks, climate risks may matter for banks’ day-to-day risk management without necessarily rising to the level of creating systemic risk issues,” he said. “Continued research is necessary to determine whether the size of climate risks in the financial system merits safety and soundness concerns." This story can be read in its entirety on the Wolters Kluwer Vital Law site at  https://lnkd.in/dS_8_dKq. As reported by Jeff Williams #BankPolicyInstitute #BankingOperations #ClimateChange #ClimateReporting #ClimateRisks #SystematicRisks 

Your bank may be at risk. ⛈️ Financial institutions confront significant uncertainties and vulnerabilities stemming from climate change. ❔ How can you prepare your financial institution's assets for climate-related risks? ☁️ Our Climate Risk Assessment Use Case, only on https://hubs.ly/Q02zLf0x0. ☀️ Learn how to utilize a diverse range of data sources to understand how your assets are vulnerable to climate-related risks. Join now for free! #data #climaterisks #banking