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Financial institutions battling climate-related shocks says IMF

According to a new International Monetary Fund report, the effects of extreme weather conditions are harmful to the health of financial systems.

According to the report "How Economies and Financial Systems Can Better Gauge Climate Risks," banks, insurers, and others in the financial sector needed tools to manage climate risks in their operations and balance sheets in order to make well-informed decisions about future operations.

It went on to say that the risks of transitioning to a low-carbon economy affect financial institutions as well, citing the costs of new carbon taxes or new laws requiring the phase-out of fossil fuels before greener replacements were available.

"At the same time, as financial supervisors monitor the system's resilience, they need tools to adequately assess and supervise these risks," it said.

According to the IMF, with the right tools, financial sector authorities could begin to assess climate risks as a critical input to determining how to manage them through appropriate policies.

"This is where the IMF comes in," the report said in part. The Fund's Financial Sector Assessment Programme already conducts regular assessments of banks' and other institutions' resilience, including stress tests to better gauge systemic risks. These procedures are being updated to include climate risk analysis in order to better assess the financial stability risks posed by climate change.

"Risk analysis typically entails the development of scenario-based stress tests for assessing bank solvency. The process includes adverse macroeconomic scenarios created specifically for the tests, such as an economic contraction, rising unemployment, exchange-rate shocks, and falling asset prices."

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