Climate change and the transition to net zero carbon emissions pose risks to households and firms, and therefore to the financial sector.
The European Central Bank (ECB) carried out a climate risk stress test among significant institutions. The exercise was carried out to assess the internally built climate risk stress-testing capabilities of the banks in scope.
The stress test analyses the banks’ climate-related and environmental risk management practices, which will seek to comprehensively assess how banks have incorporated these risks into their strategy, governance and risk management frameworks and processes.
The first ECB Climate Stress Test delivered manageable results for the banking sector but also highlighted many climate risk management challenges going forward.
A&M’s Financial Services Industry team delve into the 2022 result, highlighting 5 key results:
1. Stress test overall scorecard displays considerable gaps
2. Quantitative loss impact is manageable
3. Wide range of outcomes lead to high modeling uncertainty
4. Learning nature of exercise will limit capital impact
5. Banks will now focus on climate as a business opportunity
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