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French and UK banking regulators are among the first to require stress tests for climate change, which will make banks more aware of how climate risk can increase other types of risk, including credit, market, business and reputational risk. Greater awareness should help to drive banks’ sustainability objectives, and while the French and UK stress tests will not formally test banks’ capital adequacy, Fitch expects that climate-change risks will eventually feed into prudential capital requirements across Europe.
Climate change could affect banks’ financial performance through “physical” risks and “transition” risks. Physical climate-related risks are events that could disrupt business, such as droughts, floods and fires, as well as longer-term changes in weather patterns that could affect rainfall, sea levels and temperatures. Transition climate-related risks arise from the transition to a low-carbon economy, which could affect banks’ asset quality through reduced public sentiment towards certain sectors or the write-down of carbon-intensive assets.
https://www.lifehealth.com/climate-stress-tests-will-eventually-influence-european-bank-capital/
