The Bank of England is all set to examine the risks of climate change like rising temperatures and sea levels, which could pose a problem for the financial system down the line. The UK banks will be required to share their exposure to the issue of climate change as a part of the climate stress test this year. The stress test will put 19 banks and insuring companies through various scenarios. It will be the first time for major UK banks to reveal their exposure limitations and effects of climate change to the government.
These tests, which look forward 30 years, faced a delayed launch this year due to the Coronavirus pandemic. The Central Bank has ensured that the gathered information will not be used to set up capital requirements from each of the respective banks but will determine the financial overlay the banks and financial institutions require in order to protect themselves from risks related to high-value loans and empty balance sheets. This test will help financial institutions to figure out how to manage their risks and move ahead with strategic implementation and help the financers as a whole to figure out the best practices.
According to David Barmes, a senior economist shared his concerns with not using the results to determine the capital requirements as these could be a good way to figure out the actual requirements of certain banks. This is a wasted opportunity as the data that could have been used for good will now be dumped away after figuring out the environmental impacts. It will be a good process to align their efforts with the government’s plans for future proofing, and the banks should introduce more such policies without any delay. As the capital requirements are not being considered, the Bank is underestimating its function to protect the smooth functioning of finances and to support net-zero.
The test was planned out for last year, but luckily, for the big lenders like NatWest, Barclays, HSBC, Lloyds, and Standard Chartered, they did not have to shed out resources which helped them to contribute billions of pounds worth of Covid emergency loans to their customers. As many as twelve insurers will also be a part of this test, which will mark the second time the insurance sector will be tested for challenging climatic changes and risks. The Bank of England will not share any individual data and will not be picking out businesses through the series of tests and will publish only the aggregate numbers for the insurance and banking sector in May 2022.