New Zealand central bank stress tests large banks for climate risks

The Reserve Bank of New Zealand (RBNZ) is stress testing the country's five largest banks for resilience to climate change risks, joining other central banks in assessing climate scenarios.

The RBNZ handed its "Too Little, Too Late" stress test to Bank of New Zealand, ANZ Bank New Zealand Ltd., ASB Bank Ltd., Kiwibank Ltd. and Westpac New Zealand Ltd. to gauge their ability to manage a scenario where temperatures rise 2 degrees Celsius, carbon prices exceed $300 and growth slows as New Zealand transitions to a low-emissions economy over 28 years.

The financial regulator is the latest in a line of central banks around the world to run tests on climate scenarios. The European Central Bank completed a climate stress test for 104 significant financial institutions. The US Federal Reserve in 2022 announced it was conducting a climate scenario analysis involving several US banks. The Hong Kong Monetary Authority in 2021 undertook a pilot exercise on climate risk stress test.

Climate already hurting

The RBNZ said climate-related risks are impacting the country's economy, such as the inland flooding that hit Auckland and other areas earlier in 2023.

"We think it is prudent to explore the more severe aspects of climate-related physical risks, which are expected to increase in the future, combined with risks that may materialize in transitioning to a lower carbon-emitting economy, through a stress test of our largest banks," the central bank said in an Aug. 10 statement.

The stress test replaces the regulator's annual bank solvency stress test. Banks will have until the end of the year to publish their results.

The RBNZ in 2022 asked banks to measure their exposure in mortgage portfolios to flood zones. The results found significant differences in the share of mortgage lending on properties in flood zones. The central bank stress test also showed more than a quarter of banks' Auckland mortgage lending was on land that could be impacted by flooding.