An in-depth analysis by the Bank of Korea has highlighted a potential massive financial risk to Korea’s financial sector if no action is taken against climate change.
According to Chosun Biz, the study, revealed during a “Climate Finance Conference” in Seoul, conducted by the Bank of Korea and the Financial Supervisory Service, estimated potential losses exceeding 45 trillion won.
This stark forecast was part of a broader stress test exercise across 14 financial institutions, including seven banks and seven insurance companies, assessing the vulnerability of Korea’s financial system to climate-induced financial risks.
The stress tests were designed to evaluate the impact of various climate scenarios on financial stability. These scenarios ranged from achieving a 1.5℃ temperature increase cap by 2050, which aligns with aggressive carbon neutrality goals, to scenarios with no climate policies in place, which forecast the greatest financial losses due to increased natural disasters like high temperatures and heavy rainfall. The potential financial losses are not evenly distributed across industries; sectors such as steel and metal processing could see significant impacts under climate response policies, while groceries, restaurants, construction, and real estate would suffer in a no-response scenario.
In terms of financial soundness indicators, the stress tests showed that the Bank for International Settlements (BIS) capital ratio could fall below the regulatory minimum of 11.5% in scenarios lacking adequate climate action. This metric is critical as it measures banks’ capital adequacy to cover potential risks. Although some banks may see a temporary drop in BIS ratios, these are expected to recover by 2100 if corrective climate policies are implemented.
For the insurance sector, despite varying impacts across scenarios, solvency ratios remained above regulatory benchmarks, suggesting a more resilient posture against climate-induced financial shocks. However, the tests indicated that without proper climate action, these ratios could decrease, impacting overall market stability and financial soundness.
The Bank of Korea has called for enhanced risk management guidelines and mandatory climate scenario analysis and stress testing among financial institutions. They emphasize the importance of green and adaptive investments, which not only address environmental impacts but also reduce vulnerability to climate crises.
On a broader scale, the Financial Supervisory Service conducted similar stress tests on 36 financial institutions. These tests corroborated the significant risks posed by climate change, predicting a steeper decline in capital ratios and a higher total loss in a no-response scenario compared to one where carbon neutrality is achieved.
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