Turning up the heat: banking and insurance authorities focus on climate risk assessment in the financial sector

Bank for International Settlements, Basel, Switzerland, 20-21 February 2020

Firms and financial authorities need to improve their ability to assess the financial risks posed by climate change. At present, such capabilities vary considerably across jurisdictions and financial sectors.

This was one conclusion of a meeting convened by the BIS's Financial Stability Institute (FSI) in Basel, Switzerland. The participants, who included 97 representatives of central banks, financial supervisory authorities, banks, insurers, academia and climate risk modellers from 69 jurisdictions, agreed that climate change now poses a credible threat to financial stability. Either of the extreme scenarios - a successful transition to a low-carbon economy and an unsuccessful scenario - could jeopardise financial stability if policymakers and firms are left unprepared.

A consensus is already emerging on how climate change could manifest itself in various forms of financial risk, the meeting heard. But further work is needed to improve the accuracy of loss estimates related to climate change. Financial institutions and supervisory authorities need to consider how severely a range of future climate possibilities could shock financial institutions' balance sheets.

At the meeting, keynote speeches were delivered by Luiz Awazu Pereira da Silva, the BIS's Deputy General Manager, Leena Srivastava, Deputy Director General for Science at the International Institute for Applied Systems Analysis and Co-Chair of the Advisory Committee of Future Earth, and Geoff Summerhayes, Executive Board Member, Australia Prudential Regulation Authority and Chairman of the Sustainable Insurance Forum.

The best scientists, the frequency and severity of recent weather events - all these warn us that it is urgent to assess the potential impact of climate risk on financial stability. 

Luiz Awazu Pereira da Silva, Deputy General Manager of the BIS

The meeting's six panel sessions focused on climate risk assessment. They covered both strategic issues such as the sequencing of regulatory and supervisory measures and technical discussions such as climate risk modelling. Supervisory authorities shared their expertise on the stress testing of climate risks and how to conduct such exercises effectively. Authors of the recent FSI Insights on climate risk assessment in the insurance sector highlighted the paper's key findings, which drew on a survey of 18 insurance authorities. There was also an exchange of views on how existing risk management requirements for banks and insurers could be adjusted to capture their climate risk exposures.

A comprehensive analytical framework that includes sound impact assessment methods is an important first step in making climate risk an integral component of prudential frameworks.

Fernando Restoy, Chairman, FSI, BIS

Representatives of standard-setting bodies and international climate forums also explained how their work plans will contribute to global efforts to mitigate the risk that climate change will lead to future financial crises. For its part, the FSI will continue to support efforts to build capacity and enhance understanding of climate risks within the global supervisory community.