BCBS Report Concludes Basel Risk Categories Can Capture Climate Risks
BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks. The reports provide a conceptual foundation for the next phase of the Basel Committee work to identify potential gaps in the Basel Framework and consider measures to address them. The key finding of the analyses is that the drivers of climate risk can be captured in traditional financial risk categories, but additional progress is needed to better estimate these risks. As key challenges are addressed, the ability to estimate and effectively mitigate climate-related financial risks will improve.
The report on drivers and transmission channels of climate risks explores how climate-related risks arise and affect both banks and the banking system via micro- and macro-economic transmission channels. The report notes that economic and financial market impact of climate-related risks can vary based on geography, sector, and economic and financial system development. The report concludes with two recommendations for areas of focus in the future public, private, and academic work:
- Since the impact of climate risk drivers can be observed through traditional risk categories (such as credit risk, market risk, liquidity risk, operational risk, and reputational risk), consideration could be given to the way these risks can be addressed in the existing Basel framework. Part of BCBS' near-term work on climate change would be to identify gaps in the Basel framework, in terms of inadequate consideration of climate-related financial risks. This mapping exercise would be comprehensive and could act as a conceptual foundation for the future work of BCBS in exploring possible measures to address the identified gaps.
- Existence of research and accompanying data that explore how climate risks feed into the traditional risks is limited. A better understanding of risk drivers and their transmission channels, across all risk types, would be gained from further research. Research would also benefit from more granular information that is often privately held—for example, more granular borrower data for credit risks.
The report on measurement methodologies provides an overview of conceptual issues related to the measurement of climate-related financial risks and describes current and emerging practices of banks and supervisors in this area. The report highlights the following key findings:
- Climate-related financial risks entail unique features, which means that sufficiently granular data and forward-looking measurement methodologies are needed to address them.
- To date, measurement of climate-related financial risks has centered on mapping near-term transition risk drivers into bank exposures. Credit risk measurement has attracted the most effort, with a lesser focus on other risk categories. Initial scenario analyses and stress tests have in many cases focused on selected portfolios, or exposures for transition risks, and selected hazards for physical risks.
- Key areas for further analysis relate to gaps in data and risk classification, as well as methodologies to address uncertainties associated with the nature of climate change and the potentially longer time horizon for risks to manifest.
Related Links
Keywords: International, Banking, ESG, Basel, Credit Risk, Market Risk, Operational Risk, Data Gaps, Climate Change Risk, Liquidity Risk, Scenario Analysis, BCBS
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Karen Moss
Senior practitioner in asset and liability management (ALM) and liquidity risk who assists banking clients in advancing their treasury and balance sheet management objectives
Previous Article
OSFI Proposes to Enhance Assurance Expectations for Basel ReturnsRelated Articles
EC Regulation Sets Out Standards for Reporting and Disclosure of MREL
EC published the Implementing Regulation 2021/763 that lays down implementing technical standards for supervisory reporting and public disclosure of the minimum requirement for own funds and eligible liabilities (MREL).
APRA Decides to Standardize Submission Date for Quarterly Reporting
APRA announced the standardization of quarterly reporting due dates for authorized deposit-taking institutions.
ECB Working Group Publishes Recommendations on EURIBOR Fallbacks
The private sector working group of ECB on euro risk-free rates published the recommendations to address events that would trigger fallbacks in the Euro Interbank Offered Rate (EURIBOR)-related contracts, along with the €STR-based EURIBOR fallback rates (rates that could be used if a fallback is triggered).
Bundesbank Publishes Supporting Documentation for Reporting by Banks
Bundesbank published a list of "EntryPoints" that are accepted in its reporting system; the list provides taxonomy version and name of the module against each EntryPoint.
EBA Publishes Phase 1 of Reporting Framework 3.1
EBA published the phase 1 of its reporting framework 3.1, with the technical package covering the new reporting requirements for investment firms (under the implementing technical standards on investment firms reporting).
APRA to Finalize Capital Adequacy Standard Revisions by January 2022
Asia Pacific Australia Banking APS 111 Capital Adequacy Regulatory Capital Basel RBNZ APRA
ESMA Issues Guidelines on Outsourcing to Cloud Service Providers
ESMA published the final guidelines on outsourcing to cloud service providers.
EBA Publishes Data on Deposit Guarantee Schemes
EBA published annual data for two key concepts and indicators in the Deposit Guarantee Schemes (DGS) Directive—available financial means and covered deposits.
OSFI Sets Out Plan for Future Guidance on Managing Technology Risk
OSFI has set out the schedule for release of draft guidance on the management of technology risks by federally regulated financial institutions and private pension plans.
MAS Updates Housing Loan Rules, Proposes Corporate Governance Guidance
MAS updated rules for new housing loans by banks and finance companies.
