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PRA stress testing lender loan books for climate change effects

  • 16/01/2020
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PRA stress testing lender loan books for climate change effects
The Prudential Regulation Authority (PRA) is stress testing mortgage lenders’ loan books against the potential impacts of climate change.


Family Building Society CEO Mark Bogard revealed the regulator was asking lenders to explore how a range of climate change scenarios would affect them, for example the effect of higher water levels and flooding on property values.

Bogard revealed the details at the launch of the mutual’s Later life borrowing in a world that’s living longer report, which was conducted by London School of Economics (LSE).

He said: “The PRA has just started to ask lenders to go on the journey to understand the risks, if any, inherent in lending books associated with certain temperature change scenarios and what that looks like.

“They’ve told us they will help us with that, we’re not climatologists, so it’ll be quite interesting to see.

“It’s relatively easy for them to give us a few scenarios, a bit like stress testing – if this happens what does it look like for your mortgage book?”

Christine Whitehead, emeritus professor of housing economics at LSE London was co-author of the report.

She noted that the impact of climate change on housing was a particularly serious concern.

“I have nightmares about this, literally, because in a certain wider environment the capital value of housing may start to look like the capital value of retail and that is a really scary thought,” she said.


Measure climate-related risks

In December the Bank of England (BoE) published a discussion paper proposing to use its Biennial Exploratory Scenario (BES) exercise to test the resilience of banks and insurers to climate change.

It noted that while climate-related risks will materialise over decades, actions today will affect the size of those future risks.

“It is therefore important that firms, and other stakeholders such as the bank, continue to develop innovative approaches to measure climate-related risks before it is too late to ensure resilience to them,” it said.

BoE governor Mark Carney added: “Climate change will affect the value of virtually every financial asset; the BES will help ensure the core of our financial system is resilient to those changes.”


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