Featured Product

    HKMA Examines Effect of Climate-Related Risk on Pricing of Bank Loans

    August 13, 2021

    The Hong Kong Monetary Authority (HKMA) published a research memorandum on the effect of climate-related risk on the pricing of bank loans. The authors of the memorandum assess whether, and to what extent, banks have taken the climate-related risks, particularly the transition risk, into their loan pricing considerations. Findings provide supportive evidence that banks in the region have started to incorporate climate risk considerations into their existing risk management framework. Nevertheless, managing climate risks will remain a key challenge for banks due to the different nature from the traditional risk types and data gaps.

    Based on a sample of syndicated loans originated in Asia Pacific, the analysis shows that banks in the region have started to price-in climate transition risks for loans to emissions-intensive sectors since the Paris Agreement, likely reflecting the increased global awareness of climate risks. On average, banks are estimated to charge a higher lending spread to a "high-emitting" firm (that is, “brown” firm) by 23 basis points (bps) when compared with that of a non-brown counterpart. This is economically significant as the transition risk premium is equivalent to a 14% rise in the average lending spread. In addition, the extent of the transition risk premium is also found to be dependent on the environmental attitude of banks. Specifically, “green” banks are found to charge a higher loan spread than other banks, when lending to the same "brown" firm in the post-Paris Agreement period. The analysis shows that a “green” bank would charge an additional loan spread of about 9 basis points compared with other banks, on the same brown firm in the post-Paris Agreement period. 

    Banks should keep abreast of the latest developments in climate risk management practices to adjust their own risk management approach. Therefore, policymakers in the region should proactively engage with the banking industry and help facilitate banks to incorporate climate risk management practices into their operations. HKMA has been pushing ahead with the initiatives to address climate-related issues and promote green and sustainable banking. For instance, HKMA has invited certain banks to participate in a pilot climate stress testing exercise with a view to assessing the climate resilience of the banking sector. Looking ahead, HKMA will continue to work closely with the government, the financial sector, and other key stakeholders to promote the development of green and sustainable banking in Hong Kong.

    Keywords: Europe, EU, Insurance, Reinsurance, Supervisory Activities, COVID-19, Solvency II, Technical Provisions, Reporting, Stress Testing Cyber Risk, Supervisory Convergence, Cyber Underwriting, EIOPA

    Related Articles
    News

    APRA Issues Interim Update to Policy Priorities for 2021 and Beyond

    In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.

    September 24, 2021 WebPage Regulatory News
    News

    EC Adopts Solvency II and Resolution Rules Package for Insurers

    The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.

    September 22, 2021 WebPage Regulatory News
    News

    OCC Issues Booklets on Regulatory Reporting and Earnings

    The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.

    September 22, 2021 WebPage Regulatory News
    News

    ECB Sets Out Results of Economy-Wide Climate Stress Tests

    The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.

    September 22, 2021 WebPage Regulatory News
    News

    EBA Examines Implications of Increasing Use of Digital Platforms in EU

    The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.

    September 21, 2021 WebPage Regulatory News
    News

    HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact

    The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.

    September 21, 2021 WebPage Regulatory News
    News

    ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures

    The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.

    September 21, 2021 WebPage Regulatory News
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7494