When we began incorporating climate risks into our stress testing last year, we used a scenario considering the impacts of drought in the North Island for large banks. We also conducted our first insurance stress test. It included a scenario with more severe and frequent weather events to gauge risks to insurers’ capital.
This year, our approach entailed undertaking a series of sensitivities examining risks that climate change posed to large bank’s systemically important loan exposures: residential mortgages and agriculture. Banks are currently working on both components: an assessment of residential mortgage exposures to coastal and non-coastal flooding; and an assessment of the agricultural sector’s exposure to emissions pricing and drought risk.