Regulatory and transition risks could shift rapidly in energy usage and repricing of assets. This shock could impair financial assets and propagate crises throughout the financial system and wider economy. A riskier economy may make banks riskier and fundamentally weaker.
How does climate change affect banking?
Climate change risks can cause potentially large negative shocks in banks’ trading portfolio as well. Banks need to include asset price stress scenarios into their statistical Value at Risk (VaR) and Expected Shortfall (ES) models to examine their impact in terms of additional capital and profit.
How does climate change affect finances?
The more extreme and frequent weather events get, the higher the financial damage associated on property, but also on other parts of our economy. In the case of a severe flood, for instance, a mortgage owner might lose the house and not be able to repay the full amount to the bank.
What can banks do to support climate change?
They can for example finance the taxi company’s loan for the car in a way that incentivises the better choice, such as by offering lower interest rates for more sustainable options. By promoting better consumption amongst customers, banks are also indirectly reducing their own emissions.
How does climate change affect financial stability?
But climate change could emerge as a risk to financial stability if it is not properly managed, or if the size of climate-related losses increased materially. Rising climate-related losses could also erode confidence in an institution or the financial system, leading to a withdrawal of funding.
How does climate change threaten financial stability?
Higher temperatures are leading to more natural disasters, such as hurricanes, wildfires and floods. These, in turn, are resulting in damaged property, lost income and disruptions to business activity that threaten to alter how assets, such as real estate, are valued.