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Banks Can Suffer Financial Losses From Physical And Transition Climate Change Risk Drivers

Banks Can Suffer Financial Losses From Physical And Transition Climate Change Risk Drivers

The physical and transition climate change risk drivers are likely to generate significant costs and financial losses for banks and the banking system globally. Both banks and bank supervisors need to evaluate banks’ existing risk management policies, processes, and procedures to assess whether banks are sufficiently capitalized and liquid to cope with climate-change related risks.

The increasing severity and frequency of physical climate risk events can have a significant adverse impact on the borrowers, counterparties and service providers interconnected to banks as well as to the physical properties of banks. Natural disasters, for example, can cause borrowers and banks’ counterparties financial loses which in turn could make them unable to meet their obligations to banks; natural disasters can also lead to market volatility which would make pricing collateral posted by borrowers or counterparties difficult to value accurately.

Banks and the banking system will also be affected by climate-change transition risks. As more and more countries are trying to reduce their carbon emissions, changes in technological developments, government policies, financial regulations, or investor and consumer sentiment can also impact banks’ business strategies, cost structure, and earnings.

‘Climate-related risk drivers and their transmission channels’ a report published by the Basel Committee on Banking Supervision’s Task Force on Climate-related Financial Risks (TFCR) suggests that these physical and transition drivers’ impact on banks can be observed through traditional risk categories at banks.

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