Climate-related financial risks could impact the safety and soundness of individual financial institutions, giving rise to broader financial stability implications within the banking system. Therefore, the Basel Committee on Banking Supervision (BCBS) has established the Task Force on Climate-related Risks (TFCR) to undertake work on climate-related financial risks.
The combined economic and financial impacts associated with climate change may give rise to considerable future losses for banking institutions. Against this background, an effective risk management framework for banks and supervisors should: identify material climate risk drivers and their transmission channels; map and measure climate-related exposures and any area of risk concentration; and translate climate-related risks into quantifiable financial risk metrics.
In this context, the BCBS has published the Report on Climate-related risk drivers and their transmission channel, as well as the Report on Climate-related financial risks – measurement methodologies.
BCBS – Climate-related risks
Executive summary
The BCBS has published the Report on Climate-related risk drivers and their transmission channels that illustrates how climate risk drivers affect bank’s financial risks. The BSBC has also published the Report on Climate-related financial risks – measurement methodologies, which provides an overview of measurement methodologies that banks and supervisors are currently employing or developing.
Main content
This Technical Note summarises the main aspects of these reports:
- Physical risk & transitional risk. There is broad consensus that climate risk drivers can be grouped into the following categories: physical risks, which arise from the changes in weather and climate that impact the economy; and transition risks, which arise from the transition to a low-carbon economy.
- Transmission channels. Transmission channels are the causal chains that explain how climate risk drivers impact banks directly and indirectly through their counterparties, assets, and the economy in which they operate. Transmission channels can be classified as microeconomic or macroeconomic.
- Sources of variability. The likelihood and size of the impact of climate risk factorscan be affected by additional variables. These sources of variability are classified into the following typologies: geographical heterogeneity, amplifiers and mitigants.
- Methodological considerations. The assessment of climate-related financial risks introduces new concepts to risk managers. These concepts feature prominently in both the mapping of exposure to climate risk and the measurement of climate-related financial risks.
- Measurement methodologies. There are different measurement methodologies used to determine and measure exposure to climate-related financial risks, developed by both banks and supervisors.
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