Global banking regulators are proposing new guidance for supervising climate-related risks.
The Basel Committee on Banking Supervision launched a consultation that proposed a set of principles for applying the existing global rules to risks that arise due to the effects of global warming.
“Climate change may result in physical and transition risks that could affect the safety and soundness of individual banking institutions and have broader financial stability implications for the banking system,” the group said in its consultation paper.
The Basel Committee’s work to date has concluded that, while the existing supervisory principles are broad enough and flexible enough to allow regulators to address climate-related risks, both supervisors and banks could use additional guidance on supervisory expectations for dealing with these risks.
The proposed guidance aims to “promote a principles-based approach to improving risk management and supervisory practices related to climate-related financial risks.”
It also seeks to establish a common set of expectations for larger global banks.
“Specifically, with regard to scenario analysis, including stress testing, the principles are formulated with a view towards application to large, internationally active banks,” it said.
According to the paper, all banks are potentially exposed to climate-related risks, which could have wide-ranging impacts on a variety of sectors and countries.
“Banks should take into account the unique characteristics of such risks, including but not limited to potential transmission channels, the complexity of the impact on the economy and financial sector, uncertainty related to climate change and potential interactions between physical and transition risks,” it said.
Additionally, while some of the risks stemming from climate change are already evident, others may emerge over time and are likely to worsen.
“The high degree of uncertainty around the timing of these risks suggests that banks should take a prudent and dynamic approach to developing their risk management capacities. Different time horizons should be considered in the process of risk identification and assessment as well as in scenario analysis,” it said.
It suggested that banks should continually develop their expertise on climate-related financial risks.
The deadline for providing feedback on the proposed guidance is Feb. 16, 2022.