Banks should include relevant risks in stress testing programs to evaluate the bank’s financial position under severe but plausible scenarios, both business as usual and stressed conditions.

Other actions that the bank should perform include:

• Assess whether climate-related financial risks could cause net cash outflows or depletion of liquidity buffers.
• Banks should include climate-related financial risks assessed as material over relevant time horizons.
• Develop processes to evaluate the solvency impact of climate-related financial risks that may materialize within their capital planning horizons.

Things to Remember

• Principle 5 of the Basel Committee on Banking Supervision focuses on identifying and quantifying material risks over relevant time horizons.
• Climate-related financial risks are becoming increasingly important for banks to consider in their risk management processes.
• Stress testing programs are essential for banks to assess their resilience under different scenarios, including severe but plausible conditions.
• Net cash outflows and depletion of liquidity buffers are critical considerations for banks to ensure they can meet their obligations in times of stress.