The FSB has unveiled a new analytical framework and toolkit designed to enhance the assessment of climate-related vulnerabilities within the global financial system.
This innovative approach aims to address the complexities of climate risks which include credit, market, and liquidity risks, acknowledging the unique challenges posed by their uncertain timing and magnitude.
Sarah Breeden, Deputy Governor for Financial Stability at the Bank of England and Chair of the FSB group that prepared the report, emphasized the forward-looking nature of the framework. “The framework provides a forward-looking approach to be able to capture the unique aspects of climate risks while staying rooted in traditional financial stability analysis,” she said. This statement highlights the intent to blend new climate risk assessments with established financial stability measures to provide a more comprehensive understanding of potential impacts.
The report builds on the FSB’s existing Financial Stability Surveillance Framework and the collaborative efforts of its members. It lays out how physical and transition climate risks can propagate through, and be amplified by, the financial system globally. A key component of the toolkit includes three categories of metrics that facilitate monitoring from a forward-looking perspective. These categories are: proxies for early signals of potential drivers, exposure metrics to assess direct and indirect effects on the real economy and financial systems, and risk metrics to evaluate impacts on financial institutions and the system as a whole.
Nellie Liang, Under Secretary for Domestic Finance at the US Treasury Department and Chair of the Standing Committee on Assessment of Vulnerabilities (SCAV), also praised the framework. “The framework is a welcome addition to the FSB’s financial stability surveillance,” she noted, highlighting a case study in the report that examines the potential repercussions of climate physical risks on real estate markets and insurance coverage adjustments.
As the FSB continues to refine this framework and toolkit, they will conduct in-depth analyses and operationalize the tools to better understand and mitigate global financial stability risks linked to climate change.
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