* BoE says climate is 'first-order' strategic issue
* Costs manageable as customers will largely pay
* Test outcome won't affect capital for now
* Fitch says test is toughest by central bank so far
* ECB plans test this year, Fed yet to undertake test
LONDON, May 24 (Reuters) - Banks and insurers that fail to
manage climate risks as a "first-order" issue could face a 10%
to 15% hit to annual profits and higher capital requirements,
the Bank of England (BoE) said on Tuesday.
In its first comprehensive stress test of how Britain's
financial system will cope with climate change and the shift to
a net zero-carbon economy by 2050, the BoE said action now would
lower future costs.
"The first key lesson from this exercise is that over time
climate risks will become a persistent drag on banks' and
insurers' profitability - particularly if they don't manage them
effectively," said BoE Deputy Governor Sam Woods in a speech.
"While they vary across firms and scenarios, overall loss
rates are equivalent to an average drag on annual profits of
The Bank of France was first among central banks to
undertake a climate stress test of banks and insurers, but Fitch
said the BoE test was the toughest by a central bank so far. The
European Central Bank has planned a test for this year, while
the U.S. Federal Reserve has not begun such an exercise.
Banks across the world face pressure from climate activists
to cut financing to fossil fuel projects.
"Outright restrictions on lending to new fossil fuel
projects must now be on the table," said David Barmes, senior
economist at Positive Money, which campaigns for a sustainable
But Woods said banks and insurers would need to continue
financing more carbon-intensive sectors of the economy to help
them transition to a low carbon future.
"Cutting off finance to these corporates too quickly could
prove counterproductive, and have wide-ranging macroeconomic and
societal consequences, including through elevated energy prices
- potentially akin to those whose negative effects we are
HSBC, Lloyds, Aviva, NatWest and the Lloyd's of London
insurance market were among the group tested for early, late and
no additional action to climate change over 30 years.
In the most severe scenario posed by the BoE, where no
additional measures are taken to reduce the rise in global
temperatures, banks and insurers tested could face total losses
of 334 billion pounds ($417 billion) over three decades.
"To the extent that climate change makes the distribution of
future shocks nastier, that could imply higher capital
requirements, all else equal," Woods said, adding a debate was
to be had.
Properties at risk of flooding would become prohibitively
expensive to insure under the severe scenario, the BoE said.
The BoE tested the ability of 19 banks and insurers to
understand how climate change will affect their business models
and if they hold enough capital to cover climate-related risks
like catastrophes, or falls in the value of property and other
assets on their books.
The bank had already said there would be no pass or fail
mark due to the test's experimental nature, and the results
would not determine capital requirements for now.
The Bank of France said last year that French banks should
speed up their response to climate change.
($1 = 0.8002 pounds)
(Reporting by Huw Jones
Editing by Mark Potter)