Australia’s banks have to face climate stress tests, regulator says

Get serious on climate change risks.

That's the message from Australia's banking regulator as it joined its counterparts in the UK, the Netherlands and Singapore in ramping up its surveillance of how ready financial institutions are to deal with climate change.

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 on Friday.

Australia’s banks will have to assess how vulnerable they are to climate change.Credit:Ryan Stuart

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.

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.

The devastating bushfires that have scorched vast parts of New South Wales and Victoria have lent the issue extra urgency. With Australia the world's driest inhabited continent, Reserve Bank Governor Philip Lowe said recently that climate change was already affecting its economy and the central bank is working to understand the "full dimensionality" of the impact.

The nation's big banks and insurers have already begun to move. For example, Commonwealth Bank has run climate change physical risk scenarios on both its mortgage and agricultural lending and intends to assess other key portfolios this year, according to disclosures in its annual reports.

That willingness to contemplate change is at odds with the Scott Morrison government, which is still avidly pro-fossil fuel. Earlier this month, it announced funding to look into building a new coal-fired power plant in Queensland despite a growing backlash against the polluting fuel.


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