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UK banks to unveil their exposure to climate crisis for the first time

UK banks to unveil their exposure to climate crisis for the first time

Under the Bank of England's climate stress tests for 2021, UK banks would reportedly be forced to unveil their exposure to the global climate crisis for the first time, outlining the risks that rising sea levels and temperatures may pose to the financial system.

According to reports, 19 banks and insurers will perform the stress test through three climate scenarios, including one in which governments fail to reduce greenhouse gas emissions. Which would cause average temperature rise of 3.3 degrees Celsius and a 3.9-meter increase in sea levels. The central bank would see how those circumstances affect possible loan losses, as customers default on them due to economic uncertainty and slowed growth.

The Bank of England, however, will not identify individual firms through the tests and will only provide aggregate findings for the banking and insurance sectors in May 2022.

The central bank stated that the data will not be used to assess capital requirements, which define the number of financial cushion banks needed to protect themselves against riskier loans and goods on their balance sheets. Instead, the exercise will enhance how banks and insurers manage risk and spur a strategic assessment of their operations in light of climate change.

The governor of the Bank of England, Andrew Bailey stated that the proposed stress tests would allow the regulator estimate the risks from climate change for both the major banks and insurers as well as the financial sector as a whole.

It will need them to establish their respective situation analysis capabilities, allowing them to better understand how many potential climate scenarios are affecting them. Consequently, climate-related financial risks will be better managed across the sector, he added.

The United Kingdom would be the first major nation to require significant pension funds to openly report the dangers that climate change poses to their assets.

The new regulations will take effect in October for plans with more than £5 billion in assets under administration, although they will be extended to smaller plans as early as 2024.

The additional openness, according to Pensions Minister Guy Opperman, will offer savers adequate information to evaluate if their pension provider matches up with their beliefs or if they are indeed okay with how climate change may affect their pension.

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