Razor Risk

Climate change may give rise to considerable future losses for banking institutions, says BIS

Apr 20, 2021By Richard Bennett
Richard Bennett

The Bank of International Settlements (BIS) whose mission is to support central banks’ pursuit of financial stability through international cooperation has published two reports on climate-related financial risks.

The two reports discuss transmission channels of climate-related risks to the banking system, and the measurement methodologies of climate-related financial risks. Climate risk drivers can be captured in traditional financial risk categories, but additional progress in data collection and veracity is needed to better estimate these risks.

The reports provide a conceptual foundation for the BIS’s next phase of work to identify potential gaps in the Basel Framework and consider measures to address them.

The two analytical reports are:

The reports are intended to be read in tandem. Climate-related risk drivers and their transmission channels explores how climate-related financial risks arise and affect both banks and the banking system. Climate-related financial risks – measurement methodologies provides an overview of conceptual issues related to climate-related financial risk measurement, and describes banks’ and supervisors’ current and emerging practices in this area.

Taken together, the reports conclude that climate risk drivers can be captured in traditional financial risk categories. But additional work is needed to connect climate risk drivers to banks’ exposures and to reliably estimate such risks. 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.

Combing these reports with the regulatory engagement that European and UK regulatory authorities have undertaken will have multiple implications across the entire financial services sector and onwards to all of the industrial sectors that they serve.

Richard Bennett, CEO Razor Risk
20th April 2021