BOK, FSS to conduct joint climate stress test with financial institutions

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The Bank of Korea (BOK) and the Financial Supervisory Service (FSS) will conduct a joint climate stress test with 15 financial institutions, the central bank and the regulator said on Wednesday.

The outcomes will enable financial institutions to develop and execute strategies for low-carbon transition.

"This joint climate stress test will be the first in the country where the BOK, the FSS and financial institutions have come together," the BOK said. "The aim is to promptly detect the impact of climate risk on financial stability and enhance the sector's capabilities in managing climate risk."

The first taskforce team meeting took place on Wednesday. The financial institutions participating in the test include KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup, DGB Daegu and BNK Busan banks. Life insurers such as Samsung, Kyobo, Hanwha and Shinhan and property and casualty insurers — Samsung, Hyundai, KB and Korean Re — are also participating.

Climate risks extend into various financial risk categories, spanning credit, market, operational and insurance risks. For example, recurring weather anomalies can destabilize a nation's economic framework, precipitating declines in government bond and stock prices. Likewise, stocks and bonds issued by fossil fuel-producing companies may face significant devaluation amid the transition to a low-carbon economy.

The test is scheduled to be carried out in stages, starting with the development of tailored climate scenarios. These will incorporate Korea's low-carbon transition pathways and their impact on the real economy. The next step involves assessing the degree of risk exposure and quantifying losses for financial companies.

The BOK and the FSS will finalize the climate scenarios during the first half of this year. Financial institutions will then estimate the impact of these scenarios in the latter half. The test will be conducted internally within each institution, with the results later compared to those from the BOK and the FSS. This comparison aims to enhance the credibility of the results.

Additionally, the BOK and the FSS will use the results to craft policies aimed at managing climate risks while ensuring financial stability. The policies will focus on encouraging financial companies to embrace a green transition. This is crucial for expanding institutions' financial support for the low-carbon transition, with the ultimate goal of achieving carbon neutrality by 2050. The BOK and the FSS plan to enhance the oversight of climate risk management as well.

At the same time, the BOK and the FSS will share the outcomes at international conferences, contributing to global discussions on climate.