Evidence-based climate stress testing

Tony Hughes

As the tangible effects of global warming have become more obvious, demand for political action has grown. In the past few years, central banks around the world have increasingly sought to use the power of local and global financial flows to reverse the trend toward higher temperatures. Allied to these aims, there is demand for a better understanding of the effects of climate change on the financial system. If global warming continues along its established path, asset values may be threatened by physical risks, which in turn would impact the financial performance of consumers and businesses, and thus banks and insurers. Conversely, if stern action is taken to address warming, either in the form of aggressive government policy or through grassroots consumer activism, existing economic patterns will shift, potentially causing a disruption to the financial sector.

EVIDENCE-BASED CLIMATE STRESS TESTING

Questions about bank safety and credit risk are empirical in nature. Over time, the climate-related data that we collect will improve in quality and quantity, and statistical methods used to analyse the data will advance. At present, our understanding of the effect of climate