While speaking at the Edinburgh Futures Institute, Alex Brazier of BoE discussed the Brexit preparations underway in UK. He then examined the importance of climate change stress tests and highlighted that the Network for Greening the Financial System is developing a set of climate scenarios for the use of regulators, with the climate change stress testing exercise expected to go live in 2021. He also emphasized that regulation must adapt if it is to ensure that the new system stays able to serve households and businesses in the face of the emerging challenges. In other words, continued stability needs regulatory agility.
Alex Brazier highlighted that the work related to Brexit has had two elements. The first element involves checking that, whatever economic disruption arises as UK leaves EU, major banks have the capacity to keep lending through it. The results of stress tests reveal that banks can withstand an economic scenario that is worse than the financial crisis. The second element has been to ensure that households and businesses using services from EU financial companies can continue to draw on those services after Brexit. BoE, the government, and FCA have put in place measures—Temporary Permissions Regimes—to ensure that UK households and businesses can continue to use these services and these contracts after Brexit. All this work will not, on its own, guarantee either market stability or economic stability as UK leaves EU. However, it does mean that companies planning for Brexit do not need to add “prepare for financial instability” to their to-do lists, freeing up their capacity to promote the smoothest possible exit from EU.
He further mentioned that BoE is looking to prepare the financial system for the challenges arising from climate change. The transition to a carbon-neutral economy will see material structural changes in the UK and world economies. BoE plans to stress test individual firms and the financial system for resilience to climate risks. The stress test will be the first of its kind to fully integrate climate scenarios with macroeconomic and financial system models. The Network for Greening the Financial System is working to develop a set of climate scenarios for regulators to use. Before going live with this exercise in 2021, consultations will be conducted actively with risk specialists across the financial sector, climate scientists, other industry experts, and other informed stakeholder groups such as the Climate Financial Risks Forum. Participants in the test will need to show how they measure, monitor, and manage the physical and transition risks to which their businesses are exposed. The aim is to motivate companies to address data gaps and develop cutting-edge risk management to ensure that the financial system can continue to serve households and businesses in the face of rising temperatures and reducing carbon emissions.
By forcing the system to measure, disclose, and confront future risks, the opportunity for finance could be unlocked to help the economy in its transition to carbon-neutrality. Thanks to the global Taskforce on Climate-related Financial Disclosures, four-fifth of the companies surveyed in the G20 are now disclosing climate-related financial risks. The stress tests will build on this. Opportunity could arise too from dealing with the risks in open-ended funds because another playing field could be leveled there. He concluded that the core of the financial system is resilience to a wide range of challenges it might face. With that, opportunities have, or are being, unlocked for finance to better serve the economy. The focus is on sustaining a financial system that serves in bad times and good; a system offering stability and opportunity. To sustain that in a changing world and changing financial system, agility is required. Agility to open up new opportunity and to respond to new challenges and ensure stability.
Related Link: Speech
Keywords: Europe, EU, UK, Banking, Stress Testing, Brexit, Financial Stability, Climate Change Risks, ESG, NGFS, BoE
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