More about banks and climate… The Reserve Bank of New Zealand (RBNZ) released their stress tests to assess New Zealand banks’ resilience to climate risk. The results may be surprising – and controversial:
“The key stress-test for New Zealand’s five largest banks in 2023 … show that the ‘Too Little Too Late’ scenario did not threaten bank solvency, as all banks were able to maintain their capital ratios. However, it did highlight that climate-related risks have the potential to significantly reduce bank profitability, raise risk-weighted assets and reduce shareholders’ returns over the medium to long term.”
RBNZ provided recommendations for banks that include
- addressing significant remaining data gaps,
- continuing the development of credit risk modelling using climate-risk variables, and
- considering cost-effective ways of tracking the insurance status of mortgages.
Responsible Investor pointed out that RBNZ “found that such a scenario would cut dividends by nearly 40 percent and profits by a quarter compared to a baseline scenario without climate effects. Banks would bear impairment expenses five times higher than the baseline.” The regulator stated they realize this scenario “represents only one way New Zealand’s climate scenario could play out. Banks will consider others as part of their own internal risk management and to feed into mandatory climate-related disclosures.”
Even though the report, findings and recommendations are specific to New Zealand and banks, others might find the scenario analyses interesting and instructive.
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