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    OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada. OSFI is working with Autorité des marchés financiers, the regulator in the province of Quebec, which will run this exercise in parallel for the financial institutions it regulates. The feedback period for this consultation ends on June 07, 2024.

    Accompanying this announcement are the draft instructions and workbook for this exercise, along with the draft methodology, which reflects feedback received from the first phase of the SCSE consultation. The final versions of these documents as well as a questionnaire (SCSE Questionnaire) will be released in late 2024. OSFI had also published, in March 2023, the Guideline B-15 on climate risk management, which outlines the expectation for regulated institutions to complete standardized climate scenario exercises, in addition to their own internal climate scenario analysis. OSFI aims to define and develop the SCSE methodology, scenarios, adjustment parameters, and calculations (top-down approach) in 2024 while regulated financial institutions are expected to identify exposures, classify them into relevant sectoral and geographical segments, and perform calculations (bottom-up approach).

    The exercise includes four separate, independent modules on Impact of Climate Transition on Credit Risks for Commercial Exposures, Impact of Climate Transition on Market Risk for Commercial Exposures, Assessment of Climate Transition Real Estate Exposures, and Assessment of Physical Risk Exposures. The transition risk modules will consider three different scenario narratives, each of which captures different degrees of transition risks.

    • Below 2 immediate an immediate policy action toward limiting average global warming to below 2 by 2100
    • Below 2 delayed a delayed policy action toward limiting average global warming to below 2 by 210
    • Net-zero 2050 (1.5) a more ambitious immediate policy action scenario to limit average global warming to 1.5 by 2100 that includes current net-zero commitments by some countries

    The regulator has used scenario data developed by the Network for the Greening of the Financial System (NGFS), specifically the NGFS Phase III scenarios, as well as the scenario data developed by the Bank of Canada (BoC), which has been customized to the Canadian economy. Among other factors, institutions are required to forecast baseline probability of default (PD) and loss given default (LGD) until 2050 and these will be used to forecast transition risks. Furthermore, granular data is required for real estate exposures for heating and energy sources from properties linked to transition risks and for geolocation of properties to be linked to physical risks. Financial institutions can begin work on the SCSE, as two sections the methodology and instructions are considered final; one section is on industry and regional sector classification for transition risks while the other one concerns geocoding and regional scope for physical risks.

     

    Visit Moody's Analytics Climate and ESG Risk Microsite to learn how you can proactively incorporate climate and ESG insights into your risk assessment process.

     

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    Keywords: Americas, Canada, Banking, ESG, Climate Change Risk, SCSE, Scenario Analysis, Transition Risk, Physical Risk, Stress Testing, Lending, AMF Quebec, OSFI

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