Bank Negara Malaysia (BNM) is planning an industry-wide climate risk stress testing (CRST) exercise in 2024. The central bank has published a discussion paper detailing the proposed framework. The CRST will assess the resilience of Malaysian financial institutions to physical and transition risks arising from various climate scenarios. The discussion paper follows persistent efforts from Malaysian regulators to address climate risk in the financial sector following the issuance of the Climate Change and Principle-based Taxonomy in April 2021.
BNM argues that in Malaysia, physical and transition risk events have already materialized. In December 2021, parts of the country were hit with a one-in-100-years flood event, bringing higher than expected economic and financial losses. Financial institutions are now faced with the challenge to transition to a low-carbon economy both locally and globally.
The discussion paper seeks feedback from applicable institutions encompassing both physical (chronic and acute) and transition risks. Based on industry responses, BNM will finalize the key elements of the CRST and publish a methodology paper by the end of 2023. The CRST exercise is planned for 2024, allowing the industry the time in 2022 and 2023 to put in place the necessary building blocks such as investing in the necessary data infrastructure, and developing the modeling and resource capacity required to assess climate-related risks.
The CRST is applicable to Islamic and conventional licensed banks, investment banks, prescribed development financial institutions, Takaful and insurance operators and re-Takaful and reinsurance operators. Malaysia currently has 16 Islamic banks and 10 Takaful operators. The proposed stress test is broadly aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures and is based on the three climate scenarios developed by the Network for Greening the Financial System. The final methodology paper will consist of the final scenarios, including the relevant variables, and guidance on other elements such as the expected risk coverage and level of granularity.