Banks and insurers in the U.K. will be stress-tested against the effects of different climate change scenarios in what the Bank of England claims will be pioneering tests.
The BoE said Dec. 18 that it would test the balance sheets of the U.K.'s biggest banks and insurers to see how they would cope with more frequent severe weather events like floods and subsidence.
It will also test them on the effect of a sudden fire-sale of "at-risk assets" where firms might decide to sharply reduce their exposure to certain asset classes, and on when banks suddenly step back from lending to high-carbon sectors or insurers sharply increase the price of flood insurance.
The central bank said both banks and insurers are exposed to climate-related risks and the actions of one sector will spill over to affect the other.
The results will be published in the second half of 2021 as part of the BoE's usual stress tests. There will be no pass or fail and the initial results will only be published in aggregate without naming individual institutions.
The BoE is consulting on the design of the exercise in a consultation that will end on March 18. The final framework will be published in the second half of 2020 and the results published in 2021.