The first stress tests to assess banks' exposure to the risks of climate change are underestimating the worst-case scenario, the European Central Bank and Bank of England have said, underscoring the challenge of making such exercises more useful.
Calls for model changes, better data, more transparency
The banking regulators say the tests are needed to assess vulnerabilities in the financial system from climate change-driven catastrophes, be they in the banks' loan portfolios, trading books or customer accounts. Tougher, mandatory climate disclosure rules for companies in the European Union, Britain, the United States from 2024 onwards will plug gaps in emissions data from customers of banks, giving a far more accurate picture of exposures. "The disclosure tool will be a bit of a game changer," said Monsur Hussain, senior director at credit ratings agency Fitch, meaning climate tests will "get more stressful" for banks.
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