BPI Welcomes Dialogue on Climate-related Risks as Senate Banking Committee Holds Hearing

Washington, D.C. — BPI issued the following statement in light of the Senate Committee on Banking, Housing and Urban Affairs hearing today on climate change and the financial system:

The Committee is examining an important issue and how it affects the US financial system. BPI and its member banks welcome engagement with policymakers as banks support their customers in transition. Eight BPI member banks have committed to net-zero greenhouse gas emissions in alignment with the Paris Agreement, and other BPI members are contributing through the Rocky Mountain Institute Center for Climate-Aligned Finance, the UNEP Finance Initiative, the Taskforce for Climate-related Financial Disclosures, and the Partnership for Carbon Accounting Financials, among others.

Banks know what’s necessary to support clients in the transition to a low carbon economy and unlock the trillions of dollars of financing that will be needed – consistent language, reliable data and policies that support capital allocation to transition activities and do not hinder them. Climate policy should take account of the need to support businesses as they seek to move from ‘brown’ to olive, to ultimately, green, and recognize the role of banks in facilitating the flow of capital to these companies and infrastructure investments.  As a result, certain policy tools that could artificially alter capital allocation away from much needed transition financing, such as climate stress-testing for capital adequacy, should be avoided.  Not only are such exercises based on long time horizons and highly variable data, but arguably they could push the very risks they are seeking to identify outside of the regulated sphere and do not encourage banks to work with clients as they transition their business models.  To address the real consequences of a warming planet and a changing global economy, it will be key for climate risk evaluation to stay rooted in reality. 

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Issue Background

Macroeconomic stress testing of bank capital levels is a key supervisory tool that was developed during the 2007-09 financial crisis and has been a core tool for the Federal Reserve to assess capital adequacy during the post-crisis period. Following from this, multiple central banks and bank regulators have indicated they wish to add climate risk scenarios to their stress testing frameworks to assess the implications of climate change to the financial system and the economy.  This is at early stages and there are some significant differences between stress-testing for capital adequacy over a two year time horizon versus long-term climate scenario analysis, which at this point is more for informing business strategy decisions and client communications as opposed to capital adequacy. The Network for Greening the Financial System published its Guide to Climate Scenario Analysis for Central Banks and Supervisors, along with a set of reference scenarios. The U.S. recently joined the NGFS and for the first time listed climate change as a risk to financial stability in its Financial Stability Report last year.

Bank Capital
Challenges in Stress Testing and Climate Change
In this research note, we present an overview of important methodological challenges associated with climate change stress testing for banks.  While significant and important progress has been made in developing climate scenario analysis, the methodological challenges collectively make the results of climate stress testing extremely subjective and highly variable. Despite these challenges, the underlying analysis …
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