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BCBS Task Force Outlines Progress on Climate Risk Initiatives

Kevin Stiroh, Co-chair of the Task Force on Climate-related Financial Risks, highlighted the importance of globally concerted efforts and information sharing.

A BCBS (Basel Committee on Banking Supervision) task force plans to identify effective supervisory practices to mitigate climate-related financial risks by March next year, a top official has said.

The TCFR (Task Force on Climate-related Financial Risks) was created in 2015 by the FSB (Financial Stability Board) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders.

In a speech at the 2020 IIF Annual Membership Meeting on last week (14 October), Kevin Stiroh, co-chair of the TFCR and Executive Vice President of the Federal Reserve Bank of New York, highlighted some of the progress made by the task force so far.

He pointed to the results from the TFCR’s stock-take of members on their existing regulatory and supervisory initiatives, published in April 2020. It found that all TFCR members agreed that climate change could have financial stability implications for the banking system.

“The majority of authorities considered it appropriate to address climate-related financial risks within their existing regulatory and supervisory framework. In addition, a large majority of members have conducted research related to measurement of climate-related financial risks,” Stiroh said.

TCFR members also identified a number of operational challenges in the development of a robust framework to assess risks – including data gaps, methodological challenges and difficulties mapping out how climate risks will affect the banking system.

The April report also noted that a majority of authorities have taken measures to raise awareness of climate-related financial risks among banks. Approximately two-fifths of members had issued, or were in the process of issuing, more principles-based guidance regarding climate-related financial risks.

However, Stiroh warns that the majority of members had not factored, or had not yet considered factoring, the mitigation of such risks into the prudential capital framework.

Building on its work so far, the TCFR is considering the extent to which climate-related financial risks are incorporated in the existing Basel Framework, and looking to identify effective supervisory practices to mitigate such risks.

These research initiatives are expected to be completed by mid-2021, Stiroh said, noting that the stock-take was conducted before the emergence of Covid-19 and further work was delayed to allow TCFR members to focus on addressing immediate financial stability priorities.

Recognising the “multitudes of initiatives” under way to better understand climate-related financial risks, Stiroh emphasised the need for global coordination to achieve actionable results.

To that effect, he said the TFCR is “actively monitoring” related initiatives in order to leverage such work and facilitate information-sharing across parallel initiatives “to the extent possible”, he said.

The TFCR is also actively engaging with the private sector and holding industry outreach events with internationally active banks to learn about banking sector practices.

“We learned that banks are attempting to gauge the financial risks arising from climate change, and are trying to integrate oversight of these risks into their overall risk management framework,” Stiroh said. “There are many measurement methodologies being considered, including scenario analysis, stress testing and heat maps.”

Noting that many methodologies are at an early stage of development or are designed for specific business models, Stiroh stressed the need for collective efforts to “bridge the knowledge gap” and “inspire consistent and comparable efforts” among stakeholders and jurisdictions.

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