BoE proposes climate change stress test

Bank of England (BoE) has published a discussion paper which sets out its proposed framework for the 2021 Biennial Exploratory Scenario (BES) exercise to test the resilience of banks and insurers to the physical and transition risks associated with different possible climate scenarios, and the financial system’s exposure more broadly to climate-related risk.

BES will use multiple scenarios that cover climate as well as macro-variables to test the resilience of the UK’s financial system against the physical and transition risks from taking early, late and no additional policy action to meet global climate goals.

The BES proposes a modelling horizon of 30 years to account for the longer time horizon of climate-related risks.

Governor Mark Carney said: “The BES is a pioneering exercise, which builds on the considerable progress in addressing climate related risks that has already been made by firms, central banks and regulators. Climate change will affect the value of virtually every financial asset; the BES will help ensure the core of our financial system is resilient to those changes.”

The Bank is consulting on the design of the exercise and welcomes feedback on the feasibility and the robustness of these proposals from firms, their counterparties, climate scientists, economists and other industry experts by 18 March 2020. The final BES framework will be published in the second half of 2020 and the results of the exercise will be published in 2021.

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