Bank of Korea Warns of Severe Financial Risks Ahead Without Urgent Climate Action
Recent findings from the Bank of Korea have brought to light a significant threat to Korea’s financial sector due to climate change. This alarming analysis emphasizes the urgent need for action to mitigate potential financial losses that could exceed 45 trillion won.
Key Findings from the Bank of Korea’s Analysis
During the recent Climate Finance Conference held in Seoul, the Bank of Korea, in collaboration with the Financial Supervisory Service, shared results from a comprehensive study. The research involved a stress test on 14 financial institutions, which included seven banks and seven insurance companies, to assess their vulnerability to climate-related financial risks.
Assessment of Climate Scenarios
The stress tests evaluated various climate scenarios, which included:
- A cap on temperature increase of 1.5℃ by 2050, aligning with ambitious carbon neutrality goals.
- Scenarios without any climate policies, predicting the highest financial losses due to increased natural disasters, such as extreme temperatures and heavy rainfall.
The potential financial impacts were not uniform across sectors. Industries such as steel and metal processing could face considerable risks under climate response policies, while sectors like groceries, restaurants, construction, and real estate would bear the brunt in scenarios with no action taken.
Financial Stability Indicators
According to the analysis, the Bank for International Settlements (BIS) capital ratio could dip below the regulatory minimum of 11.5% if adequate climate measures are not implemented. This indicator is crucial for evaluating banks’ capacity to manage potential risks. While some banks might experience a temporary decline in BIS ratios, a recovery is anticipated by 2100 if effective climate policies are enacted.
Interestingly, the insurance sector showed resilience, with solvency ratios remaining above regulatory benchmarks across various scenarios. However, without proactive climate measures, these ratios could decrease, jeopardizing overall market stability.
Recommendations for Financial Institutions
The Bank of Korea has called for:
- Enhanced risk management guidelines.
- Mandatory climate scenario analysis and stress testing for financial institutions.
- Prioritization of green and adaptive investments to address environmental challenges and reduce vulnerability to climate crises.
Broader Implications of Climate Risks
The Financial Supervisory Service also conducted similar stress tests on 36 financial institutions, corroborating the findings that predict a steep decline in capital ratios and increased total losses in a scenario with no climate response compared to one with targeted carbon neutrality efforts.
For more insights on climate finance and sustainability initiatives, you can visit the Bank of Korea or learn more about Financial Supervisory Service initiatives.
In conclusion, the study underscores the critical importance of proactive measures against climate change to safeguard the financial stability of Korea’s economy.
