RBNZ Publishes ‘Too Little, Too Late’ Climate Stress Test for Banks

The Reserve Bank of New Zealand (RBNZ) has unveiled a climate stress test scenario, named ‘Too Little, Too Late, designed to assess banks’ resilience against long-term climate-induced risks. The new initiative mandates banks to evaluate their preparedness by the end of this year. Developed collaboratively with major financial institutions like ANZ, ASB, BNZ, KiwiBank, Westpac, and climate experts, the scenario draws on the Network for Greening the Financial System’s (NGFS) core components, while also integrating New Zealand-specific factors. The moniker ‘Too Little, Too Late’ derives from the global delay by governments in enacting effective climate policies. The scenario projects a future where delayed action on emissions pricing leads to significant divergence in climate policies between a group of countries, including New Zealand and the rest of the world. A crucial aspect of the scenario is the eventual adoption of emissions pricing by New Zealand and other nations, causing a split in emissions pricing paths. The consequences include heightened transition risks and increasingly severe physical climate-related events from 2036 onward. The stress test also envisions specific extreme climate events for New Zealand, including consecutive years of severe inland floods from 2036 to 2040 and back-to-back droughts spanning 2041 to 2045. Banks are required to model the impact of this scenario on their balance sheets through 2050 before the year’s end. The RBNZ plans to release an aggregated report early next year to outline banks’ performance against these climate risks. This initiative continues the trend of integrating climate concerns into financial stability assessments, building upon prior stress tests conducted in 2021, which addressed drought conditions and intense storm events, respectively. 

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