Bank Negara Malaysia consults on climate stress tests

July 14, 2022|Written by |Bank Negara Malaysia

The Bank Negara Malaysia (BNM) has released a discussion paper outlining a framework for a climate risk stress testing exercise to take place in 2024. The paper, currently the focus of a public consultation, outlines the objectives, design features and technical elements of the stress test along with details of how it will be conducted.

Covering licensed banks and insurers, the proposed stress test is largely aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures and is based around three climate scenarios developed by the Network for Greening the Financial System. Building on existing initiatives, it is intended to assess the resilience of Malaysian financial institutions to physical and transition risks arising from various climate scenarios.

The discussion paper outlines the key features of the exercise, including participation, portfolio scope, scenario narratives and specifications, modeling horizons and assumptions for balance sheet growth. It also provides a high-level overview of the timeline, including the critical milestones and submission requirements for participating financial institutions.

The BNM makes clear that it does not intend to use the stress test results to directly set capital requirements. However “this does not preclude the ongoing supervisory review process of ensuring that all material risks are adequately managed by financial institutions”, the paper says, adding that the BNM may consider “broader use of its supervisory toolkit as appropriate, including the use of capital add-ons”.

Separately, Malaysia’s financial regulator has launched a framework for the issuance of sustainability-linked bonds which allows issuers to secure borrowing at preferential rates if they meet sustainability targets. The framework, focusing on sharia-compliant bonds linked to sustainable and responsible investment, will allow funds to be used for general purpose financing, unlike green or social bonds. It will also require issuers to appoint independent reviewers and verifiers to assess compliance with the framework and ensure that investors have accurate information on the issuer’s sustainability performance.

Comments are invited from all stakeholders and interested parties before 30 September 2022 and a feedback template is provided.

This page was last updated July 14, 2022

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