The Financial Services Agency (FSA) and the Bank of Japan (BOJ), in cooperation with three major banks, conducted the second scenario analysis on climate-related risks. The FSA and the BOJ have published a report “Second Scenario Analysis on Climate-Related Risks (Banking Sector)”, which outlines major findings, and issues and challenges drawn from the exercise.
As in the case of the first scenario analysis (“Pilot Scenario Analysis Exercise on Climate-Related Risks Based on Common Scenarios”), the aim of the second scenario analysis was not to quantitatively assess the impact of climate-related risks but to identify issues for future improvement. The analysis assessed the impact on loans (credit risk), which potentially has a large impact on banks' financial conditions. The analysis focused on transition risk analysis, considering the impact in a shorter horizon (7 years) compared with the first scenario analysis. The FSA and the BOJ added a tailored stress scenario by adjusting a NGFS scenario.
The analytical capability has been further enhanced in the participating banks since the first scenario analysis (e.g., widened coverage of analysis by sector-specific models and improved model documentation). The FSA and the BOJ conducted in-depth dialogues with the banks on issues regarding the use of scenario analysis, exploiting the horizontal review of submitted analysis from the banks.
Going forward, the FSA and the BOJ will continue dialogue with financial institutions on methods and applications of the scenario analysis, including how to address the issues identified in the first and second scenario analyses.
Second Scenario Analysis on Climate-Related Risks (Banking Sector) (Japanese)- Second Scenario Analysis on Climate-Related Risks (Banking Sector) (Summary)
A full English version will be published shortly.
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