Banks need to improve risk management, RBNZ says

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Bank profits face a battering from the impact of climate change on their business and their customers unless the banks improve their risk management, according to the Reserve Bank.

The central bank has just stress tested the top five banks’ ability to cope with drought, floods, and risks that might emerge because of efforts to decarbonise the economy through to 2050.

It found banks’ capital ratios, a measure of their core financial strength, would be all right but profits could dive 25 percent and dividends by 40 percent, the risk for their assets would increase, and their ability to cope with major economic downturns would be reduced.

Reserve Bank (RBNZ) director of financial stability Kerry Watt said the stress test scenario was tough and spread between 2023 to 2050.

“Our aim was to assess the financial impact of the scenario on the banks’ balance sheets and uplift their capability in managing climate related risks.”

Watt said the banks would be hurt financially and be weaker as a result.

“This tells us that climate related risks need to be actively managed to protect the resilience of the system to other shocks.”

The RBNZ has told the banks they need to fill their “significant” information gaps, improve their climate risk forecasting methods, and find ways to track the insurance status of mortgages.

Watt said the RBNZ would look at how it could help small banks to improve their risk monitoring and management activity.

The full stress testing and results can be found [www.rbnz.govt.nz/hub/publications/bulletin/2024/rbb-2024-87-05 here].