New Zealand central bank releases climate stress test scenario

August 24, 2023|Written by |Te Pūtea Matua / Reserve Bank of New Zealand

New Zealand’s central bank plans to assess the top banks’ exposure to climate risk using a climate stress test including extreme weather events and high transition costs.

Te Pūtea Matua, the Reserve Bank of New Zealand (RBNZ) will use a “too little, too late” scenario in which countries have delayed enacting meaningful climate change policies. The tests focus on three types of risk: transition risk, physical risk and economic impacts.

In the scenario covering a 28-year period, the EU and other countries including New Zealand have introduced policies to increase emissions pricing in 2031, which leaves them more exposed to high transition risk. Extreme weather events increase in severity and frequency from 2036, leading to an increase in emissions pricing and slowing world growth.

The risks from climate change increase throughout the scenario, which runs until 2050 and sees New Zealand suffering from two specific extreme weather events.

Two extreme inland floods between 2036 and 2040 result in insurance withdrawal in the most at-risk areas, while back-to-back years of drought between 2041 and 2045 cause rating agencies to downgrade the New Zealand economy.

In addition, there is an operational risk event to assess how banks handle climate change risk outside of credit, market, and liquidity.

The purpose of the stress tests are to improve banks’ capabilities to manage climate-related risk, said RBNZ deputy governor Christian Hawkesby.

“Climate change is already impacting the global economy and the risks are expected to intensify. The severe weather events in the North Island this year are examples of climate change playing out locally. Globally we are seeing the extreme climate crises other countries are dealing with,” he said.

The test is for the five largest banks: ANZ, ASB, BNZ, KiwiBank, and Westpac. These five hold about 90% of total bank loan balances in New Zealand, the central bank said. The banks have until the end of the year to submit their results and RBNZ will publish a report on how the banks performed in early 2024.

This page was last updated August 24, 2023

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