Australia Banks to Face Climate Stress Tests, Regulator Says

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(Bloomberg) -- Get serious on climate change risks.

That’s the message from Australia’s prudential regulator as it joined counterparts in the U.K., 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 Friday.

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.

In designing stress tests, Australian banks would benefit from “better coverage of non-financial and emerging risks,” APRA said in its statement. In its 2017 stress test on the banking system, APRA focused on how local banks would respond to a the effects of a China-led recession in Australia and New Zealand.

The devastating bushfires that have scorched an area the size of England have lent the issue extra urgency in Australia, the world’s driest inhabited continent. Reserve Bank of Australia Governor Philip Lowe said recently that climate change was already affecting Australia’s economy and the central bank is working to understand the “full dimensionality” of the impact.

Australia’s big banks and insurers have already begun to move. For example, Commonwealth Bank of Australia, the nation’s largest lender, 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 government, which is still avidly pro-fossil fuel. In February, Prime Minister Scott Morrison’s government said it would fund a study into building a new coal-fired power plant in Queensland despite a growing backlash against the polluting fuel.

©2020 Bloomberg L.P.

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