The Powerful Impact of Climate Risks On Banks
The impact of climate risks on banks is astounding and is also a rising issue recently.
The physical and transitional climate risks are changing and reshaping banks credit risk yet approaches to ECL and this varies across banks and regions and ECL here means Expected Credit Loses and climate change is a rising issue for banks too.
The cost has increased rapidly of the natural disaster over the past decade and hence the banks are now actively assessing the impacts of the changing climate and the climate risk.
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Is There Any Impact of Climate Risks On Banks?
Climate change is not only affecting banks, rather banks are also triggering climate change as they are run inside buildings and buildings are contributing to climate change. Banks help us in saving our money and at the same time it helps in supporting the economy.
In order to stay resilient, now banks have to incorporate essential tools, data, models, scenario analysis and disclosures to witness impacts of climate change on banks, and ECL.
Climate change has materialized with intensifying storms droughts, wildfires, flash floods, heatwaves, rising temperatures contributing to weather pattern changes, changing precipitation rates, and leading to Global warming and Climate change
Also, as per our current policies, Global warming can cross the mark of 3.2 Degree Celsius crossing 1.5-2 degrees benchmark given by the Paris Agreement.
Looking forward to this, today many banks have started focusing on working to reduce their overall carbon footprints and to date some banks in UK and Europe disclosed specific amount of their ECL disclosures, while others indicated that in their ECL estimation even climate risks were added, even without specific quantification.
The challenges of various banks depends based on their size, geographical region, industrial concentration, portfolio complexity.
In the future the focus should be more on the following:
- Data collection and processing
- Modelling
- Scenario analysis
- Geographical considerations
- Disclosures and transparency
The climate risk falls into 2 categories often transition risk and physical risk.
Transition Risk
Due to technological advances, we are slowing moving towards a low-carbon economy focusing on evolving the carbon markets, shifts in the expectations of stakeholder and investors and impacts on borrower’s creditworthiness.
Physical Risk
The direct assets can be acute or chronic due to the direct impacts of climate change and extreme weather events, rising temperatures due to Global warming and Climate change is affecting physical assets or collateral.
What Is The Impact of Climate Risks On Banks?
Well, in simple terms, banks carrying our assets or collateral are at risk due to rising Global warming and climate change issues triggering extreme weather events and related events.
The impacts observed are:
1. The ability to provide financial services is going down, especially due to extreme events like sudden wildfires, droughts, floods, etc.
2. Physical risks or damage can affect operations, client portfolios, bank premises, and liquidity challenges.
3. Climate change impacts can make banks less diversified and can increase impact of various events.
4. Climate risks can erode bank capital affecting assets and collaterals.
5. Might increase higher operation costs affecting the overall profitability.
Conclusion On The Original Impact of Climate Risks On Banks
Banks are super important from economic point of view an hence we need to measure the impacts of climate change and work on our actions to mitigate the climate change as fast as possible.
Banks are reliable source for us and hence it’s our duty to make sure we together protect the environment around us as soon as possible under any kind of circumstances we might have to face.
