Opening Remarks at the Climate Risk Stress Test Forum
Speeches
28 Feb 2025
Opening Remarks at the Climate Risk Stress Test Forum
Carmen Chu, Executive Director (Banking Supervision), Hong Kong Monetary Authority
- Good morning, everyone. Welcome to the Climate Risk Stress Test Forum, which brings together more than 300 subject matter experts either in person or virtually. Your presence signifies the strong commitment of the Hong Kong banking sector to tackling the pressing challenges posed by climate change.
- As we all know, climate change is not just an environmental issue affecting our daily life. It can impact our economies and entail systemic risk affecting financial stability if not properly managed. Therefore, it is crucial that we equip ourselves to measure and manage climate risks effectively. Climate risk stress test, or CRST in short, is an important tool for achieving this goal.
- The successful completion of our pilot sector-wide CRST three years ago marked a pivotal milestone in this journey. Not only did it enable the HKMA to gain valuable insights into the climate risk profile of the Hong Kong banking sector, it also facilitated the capacity building of the participating institutions in measuring climate risks.
- We did not stop there. With the strong support from the industry, we launched the second round of the CRST, making the HKMA one of the first few supervisors with an advanced supervisory tool for climate risks. Institutions which took part in both exercises would appreciate that the second round CRST is not a repeat of the pilot exercise.
- A number of enhancements to the CRST framework were made based on the experience gained and the industry feedback on the first attempt. For instance, more granular assumptions have been provided to support participating banks’ assessment. The introduction of the short-term scenario is another groundbreaking initiative of the second CRST. With the combination of both macroeconomic and climate-related shocks, as well as a stress horizon aligning with the time span of banks’ strategic planning, this new scenario can be readily integrated into banks’ risk management framework.
- The second round CRST is recently completed, and all the 46 participating banks have contributed to the accomplishment. Banks have, amongst others, provided useful information to support a comprehensive assessment of the sector-wide climate resilience under various stress scenarios.
- Let me share with you some highlights about the CRST results. Under various scenarios assumed for the exercise, the total capital ratio of the banking sector is projected to drop by 1.4 to 3.1 percentage points under the dual shocks of climate risks and an economic downturn. With capital ratio of over 20%, the Hong Kong banking sector is well positioned to cope with the shocks. You will not need to wait long before we present the positive results of the second CRST in greater detail.
- Besides the quantitative results, we acknowledge that many participating banks have strengthened their stress testing capabilities for evaluating the impact of climate risks. These banks have put in substantial resources and efforts to improve, for instance, the ways they collect and process data, granularity of assessment, methodologies as well as model governance. Some banks have made good use of technologies, such as artificial intelligence, in their assessment processes and delivering more comprehensive results. These observations are encouraging, as they have demonstrated the industry’s recognition of the importance of climate risk management.
- A number of good industry practices have emerged from the exercise. Today, we are pleased to have subject matter experts from banks, as well as research institutions and consulting firms in this field, to share their experience and insights, helping promote the overall standards and capabilities of the ecosystem as a whole.
- While we have completed two rounds of exercises, climate risk stress testing is still a relatively new risk management tool. The evolving landscape of climate risks necessitates continuous enhancement to keep our understanding up to date and relevant. We will continue to provide supervisory guidance and feedback to the industry, supporting banks’ efforts in climate-related risk management under the HKMA’s Sustainable Finance Action Agenda.
- Before passing the floor to my team members to share the climate risk stress testing results, I would like to express my sincere gratitude to our speakers today, who are senior representatives from BNP Paribas, CCX Green Finance International, CDP, China Construction Bank (Asia), Citibank (Hong Kong) and HSBC. I look forward to fruitful sharing and discussion during the day. Thank you.
