The Australian Prudential Regulation Authority (APRA) has published the Climate Vulnerability Assessment Information Paper containing the aggregated findings of its first Climate Vulnerability Assessment (CVA) of Australia’s five largest banks which show that climate change may pose future financial challenges for both banks and their borrowers.

Conducted over the past two years, the ANZ, Commonwealth Bank, Macquarie Bank, National Australia Bank and Westpac modelled the estimated future financial impact of climate change on their businesses, as well as how they might respond to the resulting physical and transition risks. The CVA Information Paper sets out the key findings from this program.

APRA undertook the CVA on behalf of the Council of Financial Regulators (CFR) to assess the potential future financial impacts of climate change, and to help banks, insurers, and superannuation trustees better understand and manage these risks.

The CVA results suggest that climate risk impacts are likely to be concentrated in specific regions and industries. For example, mortgage lending losses were higher in northern Australia, while bank losses were higher from lending to business sectors that are more exposed to transition risks, such as mining, manufacturing and transport.

In response to these potential losses, the banks predicted that they would adjust their risk appetites and lending practices, such as cutting back on high loan-to-valuation lending and reducing their exposure to higher risk regions and industries.

The CVA was not intended to test bank capital adequacy levels or to inform their prudential capital requirements.

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Author: David Jacobson
Principal, Bright Corporate Law
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