APRA has published the aggregated findings of its first Climate Vulnerability Assessment (CVA) of Australia’s five largest banks. 

The CVA saw ANZ, Commonwealth Bank, Macquarie Bank, National Australia Bank, and Westpac model the estimated future financial impact of climate change on their businesses and how they might respond to the resulting physical and transition risks. 

The CVA Information Paper released today sets out the key findings from this initiative.  

APRA deputy chair Helen Rowell said the results show that climate change may pose future financial challenges for banks and their borrowers. 

“The results suggest that banks’ losses from their lending portfolios could rise in the medium- to-long-term as climate change and the global response to it unfolds,” she said. 

“Although those impacts are not expected to cause severe stress to the banking system, climate change could lead to the banking sector being more vulnerable to future economic downturns.” 

APRA undertook the CVA on behalf of the Council of Financial Regulators (CFR) to assess the potential future financial impacts of climate change and to help banks, insurers, and superannuation trustees better understand and manage these risks. 

The CVA required participating banks to model climate risk impacts using two internationally recognised scenarios developed by the Network for Greening the Financial System. The first represented a future with a continued increase in global emissions to 2050 and beyond, while the second explored a future with a rapid reduction in global emissions from 2030. 

The CVA results suggest that climate risk impacts are likely to be concentrated in specific regions and industries. For example, mortgage lending losses were higher in northern Australia. In comparison, bank losses were higher from lending to business sectors and more exposed to transition risks, such as mining, manufacturing, and transport. 

In response to these potential losses, the banks predicted adjusting their risk appetites and lending practices, such as cutting back on high loan-to-valuation lending and reducing their exposure to higher-risk regions and industries. 

Rowell said the CVA has proved a valuable exercise for both APRA and the participating banks. 

APRA will now consider how the CVA experience can be applied to other APRA-regulated industries and climate-related challenges.