Climate stress tests: the new tool that scares banks

Posted on Nov 23, 2020 at 4:02 p.m.

In 1997, the Asian crisis hit the world economy. Ten years later, it is the “subprime” crisis and the fall of Lehman Brothers that stunned the planet. To prepare for the next storm, central banks and supervisors have developed and then generalized the use of a new means of control: the banking “stress test”.

However, among the looming risks, climate change could have significant consequences for banks as well as for the stability of the financial system. It is therefore almost natural that the Banque de France, which is one of the eight central banks behind the Network for the Greening of the Financial System (NGFS, in English), launched in 2017, turned to this tool to respond to the climate crisis. The objective is to simulate stress tests of adaptation to climate change of the projects that it finances or co-finances. But many ask the question: is the tool suitable to respond to this major and unknown challenge?

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