Central Banks Should Do Stress Tests on Climate, IMF Says

(Bloomberg) --

Central banks should develop climate-related stress tests, according to International Monetary Fund chief Kristalina Georgieva, who has put environmental issues front and center since taking over the fund in October.

Those tests can help identify the impact of shocks from global warming to the financial system, she said, writing in an IMF magazine entitled “The Economics of Climate.” The fund will push forward efforts around stress testing including through its assessments of countries’ financial sectors and economies, she said, as well as intensifying work on carbon pricing and helping governments create plans to transition to carbon-free economies.

Some, but not all, major central banks are pursuing climate-related stress tests as the financial impact of global warming rises. The Bank of England is set to test institutions’ resilience to different climate scenarios in 2021, and the European Central Bank is developing a framework for carrying out a similar exercise for its own banking sector, according to its Vice President Luis de Guindos.

Central bankers have become increasingly vocal about the economic and financial stability risks from global warming, particularly through their membership of the Network for Greening the Financial System, a group of central banks and regulators that now counts almost 50 members. The IMF aims to work more with the members of the group, Georgieva said.

Writing in a separate article for the magazine, BOE Governor Mark Carney mentioned scenario analysis as one of the things the central bank is doing to address global warming. The BOE expects firms to consider climate change in their risk management, to disclose those risks, and to assign the responsibility of overseeing them to senior managers.

“The world won’t get to net zero if the financial sector doesn’t know how our companies are responding,” Carney said. “In order to watch, we must be able to see.”

Still, Carney highlighted central banks’ limitations. “Finance will complement -- and potentially amplify -- but never substitute for climate policy action,” he said.

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Andrew Atkinson

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