On 8 June 2021, the Bank of England (BoE) published the Climate Biennial Exploratory Scenario (CBES) which explores the resilience of the largest UK banks and insurers (together participants) to the physical and transition risks associated with climate change

The key features of the CBES are:

  • Three scenarios of early, late and no action built on a subset of the Network for Greening the Financial System scenarios: these are applied over a span of thirty years reflecting the longer-term nature of climate-related risks.
  • Sizing the risks participants face based on their current (fixed) balance sheets: for banks, the exercise will focus on their credit books, whilst for insurers, the exercise will assess risks to both their assets and liabilities.
  • Qualitative questionnaire: this will capture participants’ own views on their risks, their approach to climate risk management, and their potential management actions.
  • Detailed counterparty-level analysis for the largest counterparties: the CBES asks firms to use novel modelling approaches to conduct a detailed, bottom-up analysis of their largest counterparties. For the remainder of counterparties, firms are expected to differentiate exposures by geography and sector.

The desired outcomes of the CBES are to:

  • Size the financial exposures of participants and the financial system more broadly to climate-related risks.
  • Understand the challenges to participants’ business models from these risks; and gauge their likely responses and the implications for the provision of financial services.
  • Assist participants in enhancing their management of climate-related financial risks. This includes engaging counterparties to understand their vulnerability to climate change.

The BoE expects to publish the CBES results in May 2022.

The CBES is an exploratory exercise. It will not be used by the BoE to set capital requirements. Instead, participants’ submissions may inform the Financial Policy Committee’s future approach to system-wide policy issues, and the PRA’s future supervisory approach.