The Bank Negara Malaysia (BNM) set out the proposed framework and elements for the industry-wide climate risk stress testing exercise in 2024, with the feedback period ending on September 30, 2022. The proposed climate risk stress testing exercise will be applicable to all licensed Islamic and conventional banks, licensed investment banks, and licensed insurers and takaful operators.
The paper puts forward, for discussion, the applicability and format of the exercise, along with technical elements such as scenario selection, portfolio scope, granularity, and other considerations. The 2024 climate risk stress testing exercise will assess the resilience of Malaysian financial institutions to physical and transition risks arising from various climate scenarios. The discussion paper sets out the current thinking of BNM regarding the 2024 climate risk stress testing exercise. It then outlines the key features of the exercise, including participation, scenario narratives and specifications, modeling horizon, and assumptions for balance sheet growth. The discussion paper poses specific questions to generate feedback on different elements of the exercise. BNM also welcomes feedback beyond these questions, particularly on:
- the feasibility of financial institutions running the exercise as proposed, including areas that may require additional guidance
- whether the proposed design features and conduct of the exercise would be sufficient to achieve the intended outcomes outlined in the paper
In addition, financial institutions are invited to complete the survey on climate risk stress testing capabilities and practices to help BNM gauge current capabilities among financial institutions as well as plans for further strengthening of such capabilities. Insights from the survey are intended to help BNM to understand potential gaps in climate-relevant capabilities, data and common limitations faced by financial institutions, and the existing industry best practices, all of which will inform the final calibration of the 2024 climate risk stress testing exercise. BNM also noted that data initiatives will continue to be pursued via the Joint Committee on Climate Change (JC3) Sub-committee on Bridging Data Gaps. In the immediate term, the Sub-committee will work with key public- and private-sector partners to identify critical data needs, including for the purpose of the climate risk stress testing exercise, and map them to the relevant data sources. On this, a data catalog is expected to be published by the end of 2022.
Based on industry responses to this discussion paper, BNM plans to finalize the key elements of the climate risk stress testing exercise and publish a methodology paper by the end of 2023. Financial institutions will run, in 2024, the industry-wide climate risk stress testing exercise, which will cover both quantitative and qualitative elements. Based on the submission of results by financial institutions, BNM intends to conduct an assessment to size up a system-wide impact and identify the relevant vulnerabilities. BNM plans to publish the aggregated results and immediate next steps by 2025. The aggregated results will supplement supervisors’ knowledge of individual institutions’ vulnerability to climate-related risks, as well as their governance and management of these risks.
Keywords: Asia Pacific, Malaysia, Banking, Insurance, Climate Change Risk, Stress Testing, ESG, Scenario Analysis, Climate Risk Stress Testing Exercise, BNM
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