Financial regulator climate stress test development
We worked with financial regulators to assess physical and transition risks, map risk transmission channels to the financial system, and design a best-practice climate stress test
Client context
Regulators (central bank, market regulator, and insurance regulator) wanted to:
- Conduct an initial assessment of transition and physical risks
- Develop an internal stress test to evaluate systemic financial risks of climate change
- Develop a program to improve climate readiness among its supervisees
Project overview
- Inducted an assessment of physical and transition risks within the country.
- Reviewed the landscape of supervisory climate stress tests and guidance from the NGFS to identify the optimal approaches for the central bank and associated supervisors
- Developed the set of metrics and the elements of the stress test that the central bank could conduct internally initially and then subsequently on the financial sector
Results achieved
- Produced an initial report of the climate-related financial risks faced by the country and the relevant financial transmission channels
- Developed the structure for a climate stress test including the data needs, scenarios to use, modeling decisions, and qualitative reporting to be done
- Created guidance and resources for financial institutions in the country to prepare for the climate stress test and more effectively manage climate risks