Here's how you stress test for climate risk, according to France's central bank

Here's how you stress test for climate risk, according to France's central bank

Regulators and supervisors around the world are increasingly concerned about the effects of climate change on financial stability. So they're turning to climate stress tests to amass key data on financial institutions' exposure to potential stranded assets and their ability to manage risk.

Since the 2008 financial crisis, stress tests have become a critical tool for regulators to gauge how well banks can withstand hypothetical adverse scenarios, such as a sharp market downturn or an economic shock. Regulators can then determine, for example, whether banks need to hold more capital to protect themselves against risk.

In a world first, the French central bank conducted a climate stress test on its financial sector. In this episode, we speak to Laurent Clerc, director for research and risk analysis at France's Prudential Supervision and Resolution Authority, which conducted the tests in its role as the supervisory arm of the French central bank.

"What is not necessarily perceived by institutions is the urgency," Laurent tells us. "Delays in reshaping lending or delays in insurance policies might also delay the necessary transition."

Image credit: Getty Images

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