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Why Banks Must Adapt: Integrating Climate Risk into Liquidity Management
As climate change presents significant risks to global financial systems, banks must integrate climate risk into their liquidity frameworks, necessitating robust data, risk assessment, and proactive strategies to ensure financial stability and resilience.
Jun 11, 2024
Rocco Fanciullo
Rocco Fanciullo, Head of Liquidity Risk Management, UniCredit
Why Banks Must Adapt: Integrating Climate Risk into Liquidity Management

  • Climate risk includes physical risks from extreme weather events and transition risks from regulatory changes, market shifts, and technological advancements.

  • The interconnectedness of climate risk and liquidity risk means disruptions can increase liquidity needs, requiring banks to understand and manage these impacts.

  • High-quality, accurate data is crucial for assessing and quantifying climate risks, enabling informed decision-making.

  • Banks need to identify how climate risk affects their operations, collect relevant data, assess risks through scenario modeling, and develop strategies to mitigate these risks.

  • Climate stress testing, which evaluates banks' resilience under severe climate scenarios, is essential for identifying vulnerabilities and improving preparedness.

  • Climate risk can impact liquidity positions through securities depreciation, increased liquidity needs of customers, volatility in derivatives exposures, and reputational risks.

  • Incorporating climate risk into regulatory reporting and updating risk management programs are necessary for compliance and effective risk management.

  • Proactive adaptation and robust risk management strategies are essential for banks to maintain financial stability and thrive amid growing climate challenges.

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