The Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA) issued a joint statement on the actions being taken to ensure that the financial system is prepared to respond to the climate change risks. In the statement, the authorities focus on integrating climate-related risks into financial stability monitoring and micro-supervision, analyzing the effect of climate risks on the macroeconomy and financial stability, building awareness and intellectual capacity and encouraging knowledge sharing, and integrating sustainability factors into own operations.
APRA is leading a bottom-up supervisory climate vulnerability assessment exercise with the five largest Australian banks under its supervision, using as its basis the Network for Greening the Financial System (NGFS) scenarios that are being adapted to explore the Australian conditions. RBA is assisting APRA with the exercise, which commenced in 2021 and whose results are expected to be published in 2022. The climate vulnerability assessment aims to assess potential financial exposure to climate risk, understand how banks may adjust business models and implement management actions in response to different scenarios, and foster improvement in climate risk management capabilities. Additionally, in 2021, APRA plans to finalize prudential guidance to assist supervised entities to identify, monitor, and manage the climate risks. The prudential practice guide has been informed by stakeholder consultation and provides guidance on prudent practices in the management of financial risks arising from climate change, including with respect to governance, risk management, scenario analysis, and disclosure.
APRA is also considering a periodic climate risk self-assessment survey to assist in understanding the financial sector’s alignment to the guidance. RBA will conduct analysis to monitor the implications of climate change and related mitigation policies for the economy and the transmission of monetary policy through financial markets and the banking system to households and businesses. RBA plans to continue to augment its forecasting models and its broader suite of macroeconomic models to understand the macroeconomic implications of different climate risks, including how climate risks translate into financial stability risks. APRA and RBA work with other regulatory agencies through the CFR Climate Change Working Group. Internationally, RBA and APRA will continue to share knowledge through forums including the NGFS, the Financial Stability Board (FSB), the Bank for International Settlements (BIS), and the Executives’ Meeting of East Asia Pacific Central Banks (EMEAP).
Keywords: Asia Pacific, Australia, Banking, Climate Change Risk, Disclosures, Prudential Guidance, Stress Testing, Scenario Analysis, ESG, Financial Stability, NGFS, RBA, APRA
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