HKMA publishes pilot climate risk stress test results

Climate risk stress tests by the Hong Kong Monetary Authority (HKMA) have found climate risks could cause significant adverse impacts on the banking sector under extreme scenarios.

According to the HKMA, the pilot tests showed that banks will need to take early actions to manage the potential climate risks that could impact them. However, the overall assessment by the authority found that the banking sector in Hong Kong remained resilient to climate-related shocks given the strong capital buffers that have been built up by its banks over the years.

The stress tests – which were launched in January last year – aimed to assess the climate resilience of the Hong Kong banking sector as a while and aid the capability building of banks for measuring climate risks.

Up to 7 branches of international banking groups and 20 major retail banks took part, which accounted for 80% of the banking sector’s total lending. The banks that participated assessed their climate risk exposures under a physical risk scenario involving a worsening climate situation and a further 2 scenarios that envisaged orderly and disorderly transitions to a low-emission economy.

The results of the tests showed that the extreme climate scenarios assumed in this exercise would result in a material reduction in the profitability of the participating banks due to a climb in expected credit losses from their exposures directly impacted by climate change. In addition, climate change could also weaken the capital positions of the banks, and the capital adequacy ratio of the domestic systemically important authorised institutions would drop by 3% over the 5-year horizon under the disorderly transition scenario.

Following the results, the banks who participated have developed plans to bolster their climate strategies and risk governance frameworks. Some of the measures taken by the banks include the incorporation of a broader range of climate risk factors into their risk assessment frameworks and the allocation of additional resources to climate resilient activities such as green financing and providing transition finance to support their customers’ transition to low-emission business models.

The HKMA has revealed it intended to undertake another climate risk stress test in 2 years’ time.

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