The Bank will use its 2021 biennial exploratory scenario (BES) to explore the financial risks posed by climate change. The exercise will test the resilience of the current business models of the largest banks, insurers and the financial system to climate related risks and therefore the scale of adjustment that will need to be undertaken in coming decades for the system to remain resilient.
Conducting a climate stress test poses distinct challenges compared to conventional macrofinancial or insurance stress tests. To ensure it is effective in light of these challenges, the Bank is using this discussion paper to consult relevant stakeholders on the design of the exercise. This includes financial firms, climate scientists, economists, other industry experts, and informed stakeholder groups.
The discussion paper sets out the Bank’s proposal for the 2021 BES as follows:
- Chapter 2 outlines the key features, including: participation; the nature of the scenarios; the two parts of the exercise; the modelling horizon; treatment of balance sheets; and the reporting frequency.
- Chapter 3 describes the scenario narratives.
- Chapter 4 details the scenario specification.
- Chapter 5 sets out the modelling approaches.
- Chapter 6 sets out the approach to participants’ submissions. This includes the reporting of risk exposures, as well as the management actions participants may take within the scenario.
Comments should be sent by email to ClimateBES@bankofengland.co.uk and should reach the Bank by 18 March 2020.
Discussion Paper: The 2021 biennial exploratory scenario on the financial risks from climate change