UK banks to reveal exposure to climate crisis for first time

Bank of England to examine risks rising temperatures and sea levels could pose for financial system

Last modified on Tue 8 Jun 2021 05.32 EDT

UK banks will for the first time be forced to reveal their exposure to the climate crisis, highlighting the risks that rising temperatures and sea levels could pose for the financial system, as part of the Bank of England’s climate stress tests this year.

The stress tests will put 19 banks and insurers through three climate scenarios, according to an update released Tuesday, including one where governments fail to take further steps to curb greenhouse gas emissions, resulting in average temperature increases of 3.3C and a 3.9m rise in sea levels. The central bank will be monitoring how those scenarios could impact potential loan losses, as customers default due to slowing growth and economic uncertainty.

However, the Bank of England will not identify individual businesses through the tests and will release only aggregate results for the banking and insurance sector, which will be published in May 2022.

The tests, which will look ahead 30 years, were planned for last year but were delayed due to the Covid outbreak. It meant that big lenders – including NatWest, Barclays, HSBC, Lloyds, Standard Chartered, the UK arm of Santander, Nationwide building society and Virgin Money UK – did not have to divert resources at the height of the pandemic, when they were expected to dole out billions of pounds in emergency Covid loans.

Twelve insurers will also take part, marking the second time that the insurance sector has been tested for challenging climate risks.

The central bank also confirmed that the information will not be used to set capital requirements, which determine the kind of financial cushion that banks need in order to protect them from risky loans and products on their balance sheets. Instead, the exercise is meant to improve the way banks and insurers manage risks, and prompt a strategic review of their operations in light of the climate threat.

The Bank of England governor, Andrew Bailey, said the stress tests will help the regulator “size the risks from climate change for both the largest banks and insurers as well as the financial system as a whole”.

“It will require them to build up their own scenario analysis capabilities, helping them to understand better how they are exposed under different potential climate pathways. The end result will be more robust management of climate-related financial risks across the sector,” he added.

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