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Incorporating climate risk into ALM frameworks at banks

Incorporating climate risk into ALM frameworks at banks

In this webinar convened by Risk.net in collaboration with SS&C Algorithmics, experts discuss the challenges and benefits of incorporating climate risk into asset-liability management (ALM) frameworks at banks

The panel

  • Steven Good, Director ALM and liquidity risk product management, SS&C Algorithmics
  • Sjoerd Blijlevens, Senior manager, Zanders
  • Craig Lowery, Vice-president and ESG operating model program lead, ESG central office risk management, TD Bank 
  • Dimitris Papathanasiou, Head of global funding concentration and international treasury risk, Credit Suisse
  • Moderator: Stella Farrington, Commercial editor, Risk.net

Much work has been carried out by banks around climate risk, but the focus thus far has been on integrating climate risk into credit risk processes. The work of understanding the impact of climate risk on balance sheet management and treasury is still in its infancy.

However, regulatory pressure is growing on banks to incorporate climate risk into their wider risk management frameworks. 

In this Risk.net webinar, experts discussed the impact climate risk is having, and will have, on balance sheet management, and which areas are likely to be most affected. They also discussed how the regulatory landscape is changing and what that will mean for banks. They examined the extent to which banks are carrying out climate risk stress-testing within balance sheet risk management processes, and the challenges of integrating climate risk into ALM processes. 

This article presents the key takeaways from the webinar discussion.

Climate risk impact

The panel identified several areas within treasury and funding that are likely to be impacted by climate risk. Dimitris Papathanasiou, head of global funding concentration and international treasury risk at Credit Suisse, stressed the importance of carrying out initial analysis to understand a bank’s exposure to climate risk through its activities. For example, banks need to be aware of how much risk is lurking in loans to the oil and petrochemicals industries, or the impact of green bonds issuance on the high-quality liquid assets pool. A big climate event could also have a significant impact on banks.

While the focus today is mainly on the implications of transition and physical risks on the credit profile of a borrower or issuer, there is a growing appetite to understand the impact of climate risk on funding and balance sheet management. 

Craig Lowery, vice-president and ESG operating model program lead, ESG central office risk management at TD Bank, suggested that climate risk and carbon pricing are likely to impact funds transfer pricing (FTP) by causing a repricing of financial instruments. 

He also noted that the Canadian regulator requires banks to assess climate risks and maintain capital and liquidity buffers. 

“Managing the carbon footprint and exposure relative to loans and investments is also important, as it impacts credit assessment and suitability of investments,” he said. “The development of sustainable bond and deposit issuance is still in its early stages.”

Steven Good, SS&C Algorithmics
Steven Good, SS&C Algorithmics

Steven Good, director ALM and liquidity risk product management at SS&C Algorithmics, suggested regulation is an important driver, not only for ensuring that banks consider climate risk from a credit risk perspective, but also for encouraging further analysis and integration within other risk frameworks. 

“Banks need to look forward to what their future business will be like,” he said. “Some of the loans and assets they’re providing are very long term in nature, and so these risks could be materialising within the term of these loans, and they therefore need to think about those exposures today.”


The panel agreed that most of the focus in stress-testing has been on credit risk. However, Good pointed out that the Basel Committee on Banking Supervision is pushing for analysis in other areas. 

He described two approaches to the regulatory landscape: one where regulators take a top-down approach, making high-level assumptions and cascading them down, while the other requires firms to take a bottom-up approach, applying shocks and building upwards.

The challenge for banks, said Good, is working out what their modelling strategy should be today.

As a consequence of this, banks will probably need to develop climate scenario capabilities. What that might entail will be driven by regulators and each bank’s individual choices for internal stress-testing. It will be developed over time as the industry develops, and is one of the areas with the most uncertainty. The goal would be to identify vulnerable areas, opportunities, asset types and client industry sectors, panellists said.

ALM and climate risk

While the major impact of climate risk on ALM processes is expected to be around funding and liquidity, behavioural modelling may also be impacted. 

Sjoerd Blijlevens, senior manager at Zanders, pointed to the potential drop in mortgage prepayments, increases in savings withdrawals by retail clients or credit facilities being drawn on by corporates in the wake of climate risk events. These things should be considered in scenario analysis, he said. 

Carbon risk management could also have implications for FTP processes, said Lowery. Commercial bankers are looking for opportunities to reflect lower premiums in their cost of funds to assist their efforts to promote new products to deliver green-based financing or achieve scope 3 emissions reduction goals, he said.

Ultimately, banks will start to measure where they are against financed emissions as targets are set. When they aren’t meeting those targets, they will need to purchase offsets to bring them to the right level. 

Climate risk and ALM: first stages

Co-operation between the credit risk function and treasury is key, panellists said. There needs to be a good understanding of the impact of potential climate-related losses on the bank’s capital, and the effects on the funding spreads.

Data is likely to present a challenge and become a bigger management focus. “If banks identify concentrations, they need to convince management it needs to act in time before the problem occurs, therefore taking a proactive approach,” said Papathanasiou.

In summary

There is no doubt that climate risk management is going to be a greater part of the responsibilities of treasury and ALM going forward, but there are many questions and challenges to address. 

Regulators are expected to increase their climate risk focus beyond credit risk, while ALM and treasury staff will need to be proactive and capture management’s attention before any climate-related events occur.

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