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dickson mutai

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Climate love

How We Can Better Gauge Climate Risks

How Economies and Financial Systems Can Better Gauge Climate Risks

With the right tools, policymakers can help to manage the climate risks impacting economies and financial systems

The effects of more frequent and extreme weather are consequential for the health of financial systems. The physical impacts of climate-related shocks affect financial institutions and how they make decisions. So do the risks of transition to a low-carbon economy.
To make well-informed decisions about future operations, banks, insurers, and others in the financial sector need tools to manage climate risks in their operations and balance sheets
Financial risk analysis
With the right tools, financial sector authorities can start to assess climate risks as a crucial input to gauging how to manage them with the right policies.
This is where the IMF comes in. The Fund’s Financial Sector Assessment Program already regularly examines the resilience of banks and other institutions.
Beyond the standard approach
Unlike conventional stress testing, climate risk analysis, at this stage, doesn’t focus on quantifying possible capital needs of financial institutions relative to the regulatory thresholds. Instead, the IMF approach focuses on measuring and raising awareness of risks. This reflects new challenges, including the complexities of modeling climate risk and its economic impacts over very long horizons and major data gaps.
Data and projections
The overall assessment of bank stability involves measuring how physical or transition risks impact the economy and bank capital. Physical risks are localized and require new approaches to understanding where storms and floods may strike. The analysis uses new data and projections of the likelihood and impact of different hazards on physical assets like buildings or infrastructure, and economic activity, such as extreme heat that reduces working hours.
Enhancing the policy framework
At this early stage, climate risk analysis can help raise awareness around the prudent management of climate risks and incentivize banks in improving their frameworks. At the same time, it will help to inform supervisors about the potential magnitude of climate-related risks in their jurisdictions and better understand transmission channels to the financial system.
—This article reflects research by Pierpaolo Grippa, Marco Gross, Sujan Lamichhane, Caterina Lepore, Fabian Lipinsky, Hiroko Oura and Apostolos Panagioto

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  • john linus Tom

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    • Ajema Lydiah

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      • Joseph Githinji

        8 w

        This is critical, and a great way to create awareness on importance of managing climate risks.

        • Tabitha Kimani

          8 w

          For the businesses to remain afloat, this is vey important.

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