|Expert Partners: Crown Agents Ltd|
Improving the understanding of Colombia’s finance sector of the impacts of climate change on institutional practices
This skill-share helped Colombia’s Central Bank (Banco de la Republica) and the Financial Supervision Authority (Superintendenica Financiera) to identify the channels through which climate risks can affect financial stability in Colombia, and to map these risks on the financial system through a top-down stress testing methodology.
A series of workshops built awareness of the subject and showed the statistical approaches that could be adopted to perform stress tests on the Colombian financial system. Following a literature review, the experts also recommended the use of information on precipitation to assess the impacts of El Niño on financial stability variables at the national, departmental, and sector levels.
Finally, stress testing methodology focused on the energy sector was developed with economists from the counterpart institutions, and the financial impacts of adverse climate conditions on firms in the hydroelectric power sector were mapped.
Pioneered by the Bank of England, climate stress testing in banks is an innovative approach that is still nascent.
In Colombia, a lot of work is being done to evaluate the impact of transition risk from climate change on the financial system, but very little on the effects of physical risks. As a result of this project, the Central Bank and the Financial Supervision Authority will be able to translate the financial fragility of firms into effects on the financial system using the stress testing technology of Banco de la República’s Financial Stability Department.