Bank of England consults on climate risk stress testing proposals

The Bank of England (the Bank) has published a discussion paper which sets out its proposed framework for the 2021 Biennial Exploratory Scenario (BES) exercise.

The objective of the BES is to test the resilience of the largest banks and insurers (firms) to the physical and transition risks associated with different possible climate scenarios, and the financial system’s exposure more broadly to climate-related risk.

While climate-related risks will materialise over decades, actions today will affect the size of those future risks. The Bank of England said it is therefore important that firms, and other stakeholders such as the Bank, continue to develop innovative approaches to measure climate-related risks before it is too late to ensure resilience to them.

The BES will use exploratory scenarios to size these future risks and to explore how firms might respond to them materialising, rather than testing firms’ capital adequacy.

The key features of the BES include multiple scenarios that cover climate as well as macro-variables, to test the resilience of the UK’s financial system against the physical and transition risks in three distinct climate scenarios. The BES proposes a modelling horizon of 30 years.

The Bank will disclose aggregate results of the financial sector’s resilience to climate-related risk rather than individual firms.

The governor Mark Carney said: “The BES is a pioneering exercise, which builds on the considerable progress in addressing climate related risks that has already been made by firms, central banks and regulators. Climate change will affect the value of virtually every financial asset; the BES will help ensure the core of our financial system is resilient to those changes.”

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