LONDON (Reuters) – Global banking rulemakers need to undertake further analysis to clarify if lenders need to build up bigger capital buffers to cover possible environmental risks, the Swiss-based Basel Committee of banking regulators said on Wednesday.
Central banks and investors are piling pressure on lenders to quantify the impact of climate-related risks from floods and fires on the stocks, bonds, property and loans to companies they hold on their balance sheets. There are also possible costs in transitioning from polluting to more climate-friendly assets.
The Basel Committee of regulators from more than 20 countries writes rules for banks to quantify different types of risks, such as from loans and other activities.
Quantifying risk is key to determining how much capital a bank must hold to withstand losses.
The committee concluded that traditional risk categories can be used to capture climate-related financial risks, but given uncertainty over how climate change will manifest itself in the financial system, it said it would take a deeper dive in 2021 to flesh out potential gaps in its rules.
Only then will it decide whether they should be filled by higher capital requirements or other means like tighter supervision.
“While a range of methodologies is currently in use or being developed, challenges remain in the estimation process, including data gaps and uncertainty associated with the long-term nature and unpredictability of climate change,” the committee said.
It gave no timeline for any policy recommendations.
Regulators have used stress tests for several years to check that lenders hold enough capital to survive shocks unaided by taxpayers.
The Bank of England is due this year to roll out its first climate-related stress test for lenders and insurers.
Stress tests typically measure how banks could cope with theoretical shocks based on historical economic and financial data.
“However, the uncertainty inherent in longer-dated assessments … to describe future climate-economic relationships render estimates of capital shortfall, or other measures of resiliency, less reliable than those of conventional stress tests,” Basel said.
(GRAPHIC: Basel Climate Risk Graphic – https://fingfx.thomsonreuters.com/gfx/mkt/azgvoxrzbpd/Basel%20Climate%20Risk%20Graphic.PNG)
(GRAPHIC: Basel Climate Risk Graphic 2 – https://fingfx.thomsonreuters.com/gfx/mkt/oakpewmqdpr/Basel%20Climate%20Risk%20Graphic%202.PNG)
(Reporting by Huw Jones; Editing by David Holmes)