By Emily Cadman
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Banks will have to undertake stress tests to measure their resilience to a broad range of scenarios, including “climate change financial risks,” the Australian Prudential Regulation Authority said in a statement Friday.
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Regulators around the world are starting to push banks and insurers to quantify their exposure to climate change risks amid increasing concerns that the financial system is unprepared for the likely reshaping of markets as the weather becomes more extreme.
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Key worries are how companies would deal with widespread physical damage that destroys or reduces the value of certain assets. For example, the Bank of England is asking companies what rising sea levels would do to their mortgage books and how corporate bonds from energy companies should be valued.
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The devastating bushfires that have scorched an area the size of England have lent the issue extra urgency in Australia, the world’s driest inhabited continent. Reserve Bank of Australia Governor Philip Lowe said recently that climate change was already affecting Australia’s economy and the central bank is working to understand the “full dimensionality” of the impact.
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