A new report by the International Monetary Fund has stated that the effects of extreme weather conditions are detrimental to the health of financial systems.
The report titled “How Economies and Financial Systems Can Better Gauge Climate Risks” said to make well-informed decisions about future operations, banks, insurers, and others in the financial sector needed tools to manage climate risks in their operations and balance sheets.
It added that the risks of transition to a low-carbon economy also affect financial institutions, adding that thinking of the costs of new carbon taxes or new laws that required phase-outs of fossil fuels before greener replacements were available.
It said, “At the same time, as financial supervisors monitor the resilience of the system, they need tools to adequately assess and supervise these risks.”
The IMF said with the right tools, financial sector authorities could begin to assess climate risks as a crucial input to gauging how to manage them with the right policies.
The report read in part, “This is where the IMF comes in. The Fund’s Financial Sector Assessment Programme already regularly examines the resilience of banks and other institutions, including stress tests to better gauge systemic risks. These procedures are being retooled to incorporate climate risk analysis to better gauge financial stability risks from climate change.
“Risk analysis typically entails the development of scenario-based stress tests for assessing bank solvency. The process incorporates adverse macroeconomic scenarios specifically designed for the tests including elements like an economic contraction, rising unemployment, exchange-rate shocks, and falling asset prices.”
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