Basel Committee Considering Climate Risk Assessment Techniques

The Basel Committee on Banking Supervision is considering the use of stress tests, heat maps and scenario analysis to gauge the risks from climate change on financial institutions, Kevin Stiroh said today. An EVP at the Federal Reserve Bank of New York, Stiroh co-chairs the committee’s climate change task force. He added that since “many methodologies are still at an early stage of development, and some might be idiosyncratic and adapted to certain business models, collective efforts will be needed to bridge the knowledge gap and inspire consistent and comparable efforts among stakeholders and jurisdictions.”

About two-fifths of Basel Committee members have issued or are in the process of issuing “more principles-based guidance regarding climate-related financial risks,” Stiroh said, but he noted that a majority of members “have not factored the mitigation of climate change risks into the prudential capital framework.”

Committee members identified a number of challenges in developing a framework to assess risks from climate change, including data gaps, methodological challenges and difficulties in mapping the transmission of climate risks to the banking system, Stiroh added.