A new report released today by the Financial Stability Board encouraged regulatory authorities to expand the use of climate scenario analysis and stress tests for financial institutions, although it acknowledged that more data was needed to develop such policies.
“The lack of sufficiently consistent, comparable, granular and reliable climate data reported by financial institutions is one main challenge for authorities in the development of supervisory and regulatory approaches to climate-related risks,” FSB said in the 57-page report, which was developed as part of an initiative launched last year to coordinate international efforts on the financial risks posed by climate change.
To remedy that data gap, the report recommended authorities step up efforts to identify data needed for setting objectives for disclosure. It also urged authorities to identify the relevant types of data and metrics that they may require from financial institutions, and to provide key policy considerations to assist in future work toward expanding standardized regulatory reporting requirements. It also encouraged authorities to expand the use of climate scenario analysis and stress tests.
Regarding climate scenario analysis and stress testing, the report recommended that testing include four features: physical and transition risks; key financial sectors such as banks; interdependencies between physical and transition risks, geographical and sectoral risks, as well as improved understanding of impacts on financial risks; and system-wide aspects of climate-related risks such as indirect exposures, risk transfers, spillovers and feedback loops. “When designing their climate scenario analysis and stress tests, authorities should adopt features that can best inform a system-wide view,” the report said. The American Bankers Association agrees there are significant data gaps, but has cautioned that scenario analysis should be based on actual risks that are not already mitigated through the current regulatory framework.