Climate-Related Prudential Risks in the Banking Sector: A Review of the Emerging Regulatory and Supervisory Practices

Abstract

This article reviews emerging regulatory and supervisory practices with respect to prudential risks from climate change in the banking sector. It evaluates the theoretical considerations with respect to climate-related financial risks in the banking sector, reviews the related academic literature, and analyzes the policy-related publications from various regulatory authorities. As a result of this assessment, the article concludes that the major regulatory and supervisory expectations can be categorized into four key areas: (i) board-level attention to climate risks and integrating them into internal governance frameworks, (ii) embedding climate risks into strategies and overall risk management frameworks, (iii) identifying climate-related material exposures and disclosure of relevant key metrics, and (iv) assessing capital impact from climate risk through scenario analysis and stress testing. The article also presents a number of implications for banks and banking regulators in other jurisdictions to help them identify the actions required to address climate change risks in the banking sector.