Green risks and opportunities may be covered in stress tests from 2019
The Bank of England is planning to include the impact of climate change in its UK bank stress tests as early as next year, in what would be an unprecedented move for a central bank of a major financial centre.
Mark Carney, BoE governor, told the Financial Times in an interview that he was weighing whether the risks — as well as the opportunities — from climate change should form a part of its stress test known as the exploratory scenario in 2019.
The BoE tests the balance sheets of the biggest UK lenders every year against a doomsday scenario to ensure they have enough capital to withstand a shock without needing a taxpayer bailout. It has also introduced an exploratory scenario every two years. Banks cannot pass or fail this part of the exercise — instead they are required to scrutinise whether they are doing enough around a particular issue.
The first such test, in 2017, made banks consider the threats and opportunities posed by fintech, and suggested that traditional lenders were optimistically presuming new technologies would let them cut costs without losing much market share.
“From the first one we learnt a lot about how the banks managed or didn’t manage these types of issues. And it was quite instructive,” Mr Carney said. “And so the question is whether [climate change is] the next one, or the one after.”
He joked that the exercise was akin to the traditional “ eyebrow raise” governors would use to signal their displeasure at certain banking activity in the past. The ultimate decision will be taken by the BoE’s Financial Policy Committee, which sets the stress-test scenarios.