Accounting for the Risk of Severe Weather Losses in Credit Portfolios
Physical climate risks are becoming increasingly relevant to financial institutions, yet existing credit risk frameworks remain limited in their ability to capture their potential impacts. Scenario analysis has therefore become a crucial tool for assessing how acute climate hazards may impact credit quality, capital adequacy, and financial stability.
This paper examines how established climate scenario frameworks, including those developed by the BIS, NGFS, and Canadian regulators, can be applied in a complementary manner to strengthen climate risk management in Canada. It highlights uneven progress across institutions, key data and modelling constraints, and the transmission of physical risks from borrowers to banks’ balance sheets.
As climate events become more frequent and costly, strengthening analytical capacity and integrating scenario insights into risk management and strategic decision-making will be important for supporting financial system resilience.