Climate change ‘unlikely to cause severe stress on banks’: APRA

On business loans, APRA said overall loan losses from transition risks were seen to rise “substantially” under both climate scenarios and were higher under a “delayed transition scenario”.

However, “overall, modeled increases in credit losses due to climate change are unlikely to cause severe stress on banks,” APRA said.

APRA said the potential for higher losses from climate change “could increase the banking sector’s vulnerability to future economic downturns”, but the assessments did not test bank capital adequacy levels or inform prudential capital requirements.

Stress tests: APRA has been working with banks for two years to measure the impact of climate change on mortgage and business lending. Greg Newington

APRA asked banks to use two scenarios developed by the Network for the Greening of the Financial System: one represented a future with continued growth in global emissions until 2050 and beyond; the second used a future with a rapid reduction in global emissions starting in 2030.

APRA published aggregated results from assessments, but not results from individual banks.

APRA conducts the assessments with the Council of Financial Regulators, including the Reserve Bank of Australia, as all financial regulators develop plans on the nature of climate risks and how financial institutions intend to respond

Regulators want banks to understand how severe weather can damage properties pledged as collateral for mortgage loans and how business loans can be exposed to losses if assets become stranded during the transition to a low-carbon economy or various agricultural commodities they become harder to grow.

In a separate briefing paper for bank executives published on Tuesday, APRA warned that climate change could “give rise to liability risks” arising from “the potential for litigation where institutions and boards do not consider or respond appropriately adequate to the impact of climate change”.

“APRA is of the view that climate risks can and should be managed within an institution’s overall business strategy and risk appetite, and a board should be able to demonstrate ongoing oversight of these risks,” it said.

The Climate Vulnerability Assessment project was originally announced in February 2020 and was scheduled to launch late last year. But former APRA chairman Wayne Byres said in September it had been delayed because translating the risk of physical events such as fires or floods into financial impacts was a big challenge.

APRA first told banks in early 2017 that it saw climate change as a financial risk and called on the financial sector to “rise to the challenge”.

It has since pushed lenders to improve the quality of the data used to measure such risks. There is still a long way to go: a climate risk self-assessment survey published by APRA in August found that almost a quarter of banks, insurers and super funds did not have adequate metrics to measure and monitor climate risk.

APRA said it will now look at how the experience gained from the CVA can be applied to other industries regulated by APRA.

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