Bank of England sets out first climate change stress test for banks and insurers
Testing both banks and insurers will improve risk modelling and regulation in future, says UK’s central bank
The Bank of England (BoE) has set out a stress test exploring the financial risks facing UK banks and insurers from climate change.
In a press release the bank said the Climate Biennial Exploratory Scenario (CBES) will explore the rising risks and stresses from the “significant structural changes” to the economy needed to reach net zero emissions, as well as the impact of higher global temperatures.
"This is the first time we are testing both banks and insurers to allow us to capture interactions between them and understand the risks presented by climate change across the financial system,” the BoE said.
The test will be based on three scenarios over a span of 30 years. These include: early action by governments to deal with climate change, action that is late, and taking no additional action.
For banks, the exercise will focus on their credit books, whilst for insurers it will assess risks to both their assets and liabilities.
The “learning exercise” will shape how regulators do their work and help financial firms to model climate risks better, the bank said.
"The end result will be more robust management of climate-related financial risks across the sector," BoE Governor Andrew Bailey stated.
The results of the test, which are due to be published in May next year, will not be used by the bank to set capital requirements.