RBA signals significant risk of climate change to financial system

The paper, which outlines preliminary estimates of the possible magnitude of climate exposure facing Australian banks, the RBA estimated that if left unmanaged, climate change could cause real problems for the bank. local financial system.

The RBA explained that the mortgage exposure to physical climatic risks could lead to substantial credit losses. The central bank’s calculations estimate an increase in value-at-risk (VaR) homes, or “high-risk” properties, at 8%, from 3.5% currently, over the next 80 years.

In addition, the bank found that a change in VaR of just 0.4 percentage point equates to a drop of around 10% in house prices.

“Banks lend using the current value of the home as collateral. If current values ​​do not fully reflect the long-term risks of climate change, house prices could fall, leaving banks with less protection than expected against borrower defaults, ”the RBA warned.

He pointed to international studies, many of which indicated that there is little evidence that climate change is fully accounted for in “at risk” properties, even in highly vulnerable areas.

“As a result, the price of properties considered to be at ‘high risk’ of being affected by weather events could drop sharply and banks could suffer significant credit losses if borrowers default,” he said. declared.

But the bad news for the banks does not end there, with the central bank noting that they could be at risk due to their lending to companies that are exposed to the climate risk of the transition.

“This risk is likely to be broadly proportional to the emission intensity of each industry to which they lend – whether those emissions come from the industry itself or indirectly through the industry supply chain,” said he declared.

“As Australian industries seek to shift to cleaner production methods, the level of disruption to the banking system will directly depend on the size of banks’ exposures to these emission-intensive industries. If this turns out to be important, it could have systemic consequences on the resilience of banks. “

The biggest risks for banks, he said, come from industries like power, agriculture, and oil and gas, reflecting that these industries have both relatively high emissions and that banks are reasonably exposed to them.

“The considerable uncertainty about the exact magnitude of climate change impacts makes it essential that banks further integrate climate risk into their mortgage and commercial lending processes and report on it to enable external risk assessment,” said the Bank.

In a similar study conducted by the European Central Bank, data highlighted a high threat of climate change for banks in southern Europe, with defaults on bank loans set to rise by 7% over the past 30 years. years if nothing is done to limit the climate. cash.

The ECB, however, highlighted the clear benefits that businesses and banks would see if they quickly adopted green policies to support the transition to a zero carbon economy.


The unmissable event for financial advisers is back in 2022: the ESG Summit, in Sydney and Melbourne in February. Leave with essential knowledge on a number of key ESG areas to help you make informed ESG strategy decisions and better communicate and integrate the growing ESG space with clients. Visit the website to reserve your spot.

RBA signals significant risk of climate change to financial system



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Last updated: September 23, 2021

Posted: September 23, 2021

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja’s career in journalism spans over a decade in finance, business and politics. Now an experienced writer and journalist across all facets of the financial services industry, before joining Momentum Media, Maja worked for several established news outlets in South Eastern Europe, scrutinizing key processes in post-conflict societies.


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