Bank of England to set new climate tests for UK banks

Bank of England to set new climate tests for UK banks

B of E to set new climate tests for UK banks

In a world first the Bank Of England is set to order the UK financial system to undergo a new series of tests to establish their readiness to cope with problems brought on by climate change.

The probe will be similar to the financial stress tests they already undergo on an annual basis and are seen as just as important for the future financial health of the country.

Big effect

The outcome could ultimately result in both banks and insurers having to hold more capital to carry out certain forms of business and that could have a big effect on the way the economy as a whole is funded.

It will be a massive undertaking in which firms will have to evaluate all of the thousands of assets they own to ensure they make the grade.

Tests

The actual tests are currently being devised, but it is understood the results will be graded on how firms react by either acting promptly, waiting a while before taking action or no action at all.

The Bank sees two different types of risk – physical, arising from weather related events like floods, drought and fire – or transition like things which may happen as a result of a low carbon economy, meat becoming more expensive, rises in cost caused by the mandatory insulating of homes.

A pioneering exercise

Bank Of England governor, Mark Carney, described the scheme as ‘a pioneering exercise, which builds on the considerable progress in addressing climate-related risks that has already been made by firms, central banks and regulators’.

He added: “Climate change will affect the value of virtually every financial asset. The test will help ensure the core of our financial system is resilient to those changes.”

Scenarios

The scenarios devised could be set against a background where global temperatures increase by 4 degrees centigrade by 2080, causing sea levels to rise and creating frequent extreme weather events.

Drastic global changes could create damage to property, infrastructure and farmland, disrupt business supply chains and in an extreme case lead to mass migration and death.

Bankrupt

Mark Carney said that companies which failed to respond could be in serious financial trouble, adding: “Companies that don’t adapt, including companies in the financial system, will go bankrupt without question.”

Testing will start next year, with the first results available by 2021. Taking part will be: HSBC, Barclays, Standard Chartered, Royal Bank of Scotland, Santander UK, Lloyds and Nationwide and about 39 insurers. By 2021, Clydesdale Yorkshire Bank – rebranded as Virgin Money – will also be included.

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