Climate scenario analysis, stress testing and capital requirements in the UK

Published by a LexisNexis Financial Services expert
Practice notes

Climate scenario analysis, stress testing and capital requirements in the UK

Published by a LexisNexis Financial Services expert

Practice notes
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This PRActice Note provides an introduction to the Bank of England (BoE)’s Climate Biennial Exploratory Scenario (CBES) exercise, launched in June 2021, examining the CBES’s structure, purpose, the scenarios covered and the areas of focus. It also considers the Prudential Regulation Authority (PRA)’s Climate Change Adaptation Report 2021, published in October 2021, BOE’s report on climate-related risks and the regulatory capital frameworks, published in March 2023.

Background and introduction

The BoE has noted that the financial risks posed by climate change are unprecedented, so building a toolkit to help manage and mitigate them is equally unprecedented. Climate scenario analysis and Stress testing is a key part of such a toolkit, allowing for the exploration of impacts and exposures at the level of the financial system under a range of different potential climate pathways. For these reasons, the BoE decided to use its stress testing framework to assess the impact of climate-related risks on the UK financial system.

In June 2021, the BoE published a key elements document outlining its 2021 Biennial

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Jurisdiction(s):
United Kingdom
Key definition:
Stress testing definition
What does Stress testing mean?

Banking stress tests examine the potential impact of a hypothetical adverse scenario on the individual institutions that make up the banking system, and the system as a whole.

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