The Bank of Japan will highlight climate change risks as one of the themes for the first time in its bank tests this year. It will join other major banks in trying to gain research clout on the effects of global warming.
In its guidelines on the examinations due next month, the BOJ will stress its preparedness to work closely with its banking regulator. Hand in hand with the Financial Services Agency (FSA), they will analyze the impact of climate risks on financial institutions, sources said.
Furthermore, they will take up examples, study, and measure financial risks associated with climate change.
Every year, the BOJ conducts examinations on financial institutions. However, it does not have regulatory authority, which falls under the FSA. Neither the Japanese bank nor the FSA stress-test domestic banks on climate risks at present.
The number of countries working on stress-testing financial institutions on climate risks is increasing. Others are already considering doing the same. The action is part of Japan’s efforts to follow in their footsteps.
“For the BOJ, green QE is still off the radar,” one of the sources said. The more approachable and near-term focus is to assess climate change risks on the financial system, the source added.
Another source said climate change is a key theme for the BOJ this year. Moreover, they’ve added that stress-testing climate risks on financial institutions are “not imminent, but something Japan needs to aim for in the future.”
Discussing climate change.
With these highlighting, analyzing, and measuring climate risks, officials of the two institutions have discussed climate change. This is among topics that could affect Japan’s banking system.
However, there is a lack of data and models, causing the progress toward stress-testing financial institutions to go slow.
The Japanese central bank began to gear up efforts on this subject after Prime Minister Yoshihide Suga’s promise. Last year, he pledged to make “green” investment a key pillar of his growth strategy.
Sources have also said another thing that has prodded the BOJ to engage in this move was the Biden administration’s focus on tackling the issue. Additionally, the Federal Reserve’s decision in December to join an international central banks’ group focused on the same.
Although, the actual roll-out of stress tests will take at least another year. This is due to policymakers having to work out guidelines and details. And sources said these will include whether they will ask banks to conduct a “self-assessment.”