ANZ, ASB, BNZ, KiwiBank and Westpac, which collectively hold 90% of bank loan balances, have agreed to take part in the climate-related test scenario which will look at their ability to withstand severe, but plausible long-term climate-related challenges.
Deputy Governor Christian Hawkesby says the RBNZ runs the test each year to assess banks’ resilience, making sure they have enough capital to withstand severe shocks, while being able to continue supporting the economy.
The broader New Zealand economy has already been impacted by the cyclone and inland flooding affecting Auckland and other areas of the North Island in early 2023. “Globally we are seeing the extreme climate crises other countries are dealing with,” Hawkesby says.
As a result the RBNZ thinks it prudent to explore the more severe aspects of climate-related physical risks, which are expected to increase in the future, combined with risks that may materialise in transitioning to a lower carbon emitting economy, through a stress test of our largest banks.
“As kaitiaki of Aotearoa’s financial system, we have a role to play in helping the financial industry prepare for the growing physical and transition risks that climate change poses, and that’s what this stress test scenario aims to do.”
The scenario, ‘Too Little Too Late’ covers the period from 2023 to 2050, with most climate impacts happening after 2030. It was developed with climate experts and the participating banks. It is based on core components of scenarios developed by the 127 strong member international body the Network for Greening the Financial System, plus New Zealand specific elements. The NGFS, made up mainly of central banks and supervisors, was formed to provide research on climate-related risks to the financial system.
The banks have until the end of this year to determine their exposure to climate-related risks by modelling the effects of the scenario on their balance sheets out to 2050. Next year the RBNZ will publish an aggregate report on how the banks fared.
Hawkesby says non-participating banks and other financial institutions may also find the scenario helpful in developing their own responses to climate risks.
The Reserve Bank runs a regular stress test programme for various economic downturn scenarios which also covers general and life insurance.
