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    BoE Publishes Key Elements of Climate Biennial Exploratory Scenario

    June 08, 2021

    BoE published the Climate Biennial Exploratory Scenario (CBES) to explore the financial risks posed by climate change for the largest UK banks and insurers. The 2021 Scenario will examine resilience of the financial system in UK to the physical and transition risks associated with different climate pathways. BoE expects to publish the CBES results in May 2022. BoE also published key elements of the 2021 Biennial Exploratory Scenario, along with the guidance for participants of the 2021 Biennial Exploratory Scenario.

    This is the first time BoE is testing both banks and insurers to allow capture interactions between them and understand the risks presented by climate change across the financial system. The CBES is an exploratory exercise and will not be used to set capital requirements. Instead, participants’ submissions may inform the Financial Policy Committee’s future approach to system-wide policy issues and PRA's future supervisory approach. The key features of the CBES are:

    • Three scenarios of early, late, and no action built on a subset of NGFS scenarios. These are applied over a span of thirty years, reflecting the longer-term nature of climate-related risks.
    • Sizing the risks participants face based on their current (fixed) balance sheets. For banks, the exercise will focus on their credit books while, for insurers, the exercise will assess risks to both their assets and liabilities.
    • Qualitative questionnaire. This will capture participants’ own views on their risks, their approach to climate risk management, and their potential management actions
    • Detailed counterparty-level analysis for the largest counterparties. CBES asks firms to use novel modelling approaches to conduct a detailed, bottom-up analysis of their largest counterparties. For the remainder of counterparties, firms are expected to differentiate exposures by geography and sector.

    The objectives of the exercise are to size the financial exposures of individual firms and the financial system to their end-2020 balance sheets. This will shine a light on risks that are currently opaque. The exercise aims to understand business model challenges and likely responses to these risks. This will highlight where action may be needed and any implications for the provision of financial services. Moreover, the exercise aims to improve firms’ risk management and prompt a strategic view; this includes building capability, both among participants and within BoE. The exercise will also encourage participants to engage their largest counterparties to understand their vulnerability to climate change.

    The guidance for participants of the 2021 Biennial Exploratory Scenario accompanies the final data templates and the final qualitative questionnaire. In April 2021, BoE had published an early version of this guidance document to support participants by improving their readiness for the exercise. The purpose of this document is to help participants understand the data requirements, including any changes to requirements, compared to those published in April. Relative to the April publication, this document includes additional sections with more detail on the approach to analysis participants should adopt for different asset types, explicitly linking that approach to scenario narratives and published variable paths. 

     

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    Keywords: Europe, UK, Banking, Insurance, CBES, ESG, Stress Testing, Reporting, Climate Change Risk, Data Templates, BoE

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