Britain’s prime banks and insurers should be examined together for the first time in 2021 to quantify the potential financial hit from climate change to their businesses, the Bank of England suggested Wednesday.
However, there will be no fail or pass mark when the results are revealed in the second quarter of 2021, and no separate firm will probably be named, the central bank stated in a paper asking for industry feedback on its plans.
Climate change and the regulatory and political response to environmental problems are more and more seen as one of the greatest long-interval threats to the financial business.
Switzerland’s financial market supervisor FINMA this month recognized broad-based risks starting from rising natural disaster costs that would cause significant losses for insurers to a drastic repricing of climate-exposed assets.
The BoE mentioned the aim of the test wouldn’t be to test whether banks and insurers hold sufficient capital to face up to the impact of climate change on their assets and enterprise models.
Aggregate outcomes will be revealed; however, the BoE will use results of separate agencies to examine if they’re correctly managing risks from the switch to a low carbon economy and bodily harm from bad weather to property and infrastructure.
As with other dangers facing banks and insurers, the BoE has a variety of tools it may use to alter behavior, such as capital “add-ons” and placing pressure on managers who’ve direct responsibility for coping with climate change risks.
Major UK-based banks that take part in the present annual pressure test of lenders will be included in the 2021 exercise, together with a representative of insurers.
The test will assess the effect of climate change on asset costs and enterprise models over three situations: taking early action, acting late, or taking no action in any respect to meet the global climate goals.