Reserve Bank stress tests banks on climate risk

With climate-related risks already impacting the financial system, the Reserve Bank of New Zealand (RBNZ) has made public the test* it is using to climate stress test the five largest banks.

Thursday, August 10th 2023, 2:11PM 1 Comment

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.

*RBNZ 2023 Climate Stress Test scenario

Tags: RBNZ

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Comments from our readers

On 10 August 2023 at 5:22 pm Amused said:

Senior research fellow Bryce Wilkinson said the following about the RBNZ earlier this year in his report, Made by Government: New Zealand's Monetary Policy Mess,

“The RBNZ's handling of monetary policy before and during the pandemic, which left interest rates too low for too long resulted in inflation getting out of control, and stimulating the economy which triggered the housing boom.”

“The RBNZ not pay close enough attention to keeping inflation in check, and then acted too late to correct their mistakes.”

“The RBNZ was distracted by its other mandate - maximising employment - along with a clutch of secondary issues such as climate change.” "New Zealand's recent monetary policy outcomes are worse than unsatisfactory," Wilkinson wrote.

"The Minister of Finance bears the heaviest responsibility for monetary policy decisions."

"He determines its objectives and appoints the Governor. He plays a decisive role in making appointments to the Reserve Bank Board, and also influences MPC appointments."

Wilkinson said Robertson had also loaded the RBNZ with extraneous duties and remits in areas that had no relevance to monetary policy, and which could not be affected by it. He said as a result the RBNZ had lost credibility as an inflation targeting institution and had become partly politicised through the way it was being managed by the Minister.

It made little difference that the RBNZ was in the same camp and had made the same mistakes as other central banks around the world. "The outcomes for New Zealanders count, and the inflation and fiscal cost outcomes were poor."

Wilkinson said the real message of the report was aimed at the next government.

"They need to pay serious attention to what changes they might make to reposition the Bank. As a boat, it is off course and far from watertight."

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