Learning objectives: Describe climate-related risk drivers and explain how those drivers give rise to different types of risks for banks. Compare physical and transition risk drivers related to climate change.
Questions:
22.6.1. The Basel Framework includes the following traditional top-level financial risks: credit, market, liquidity, and operational risks. Climate change introduces climate risk drivers that impact banks via transmission channels. The impact of these risk drivers is ultimately reflected (i.e., manifest as consequences) in the traditional financial risk categories such as credit risk or operational risk.
A key question is whether ADDITIONAL categories should be added to the top-level financial risk typology (e.g., credit risk, market risk) in order to capture the unique impact(s) of climate risk drivers. According to the Basel Committee on Banking Supervision (BCBS), what is the consensus as to which financial risk categories should be ADDED to capture the impact of climate risk drivers?
a. There is not a consensus because different BCBS survey/workshop participants appended very different sets of financial risk categories
b. None, as the consensus is that the traditional, extant risk categories reflected in the Basel Framework are sufficient to capture climate-related financial risk
c. The consensus is that the traditional risk categories should be appended with the following financial risk categories: acute, chronic, and sentiment
d. The consensus is that the traditional risk categories should be appended with the following risk categories: microeconomic, macroeconomic, and geographic
22.6.2. Climate-related changes map ultimately to financial risk by way of climate risk drivers: the climate risk drivers impact banks directly and indirectly via causal chains (i.e., transmission channels). There is broad consensus that these drivers can be grouped into either physical risks or transition risks. In regard to these climate risk drivers, each of the following statements is true EXCEPT which is false?
a. Investor and consumer sentiment are transition risk drivers
b. Heatwaves, floods, and extreme precipitation are acute physical risk drivers
c. Rising sea levels, rising average temperatures, and ocean acidification are chronic physical risk drivers
d. Net-zero policies should not be classified as climate risk drivers but should be viewed (like other insurance policies) as mitigants or mitigation
22.6.3. Sally is an analyst working on the ESG criteria that will inform her firm's investment policy. As part of this work, she is building a glossary of climate-related terms. Her glossary includes the definitions below.
a. There is exactly one glaring mistake
b. There are three glaring (or obvious) mistakes
c. Most (i.e., more than half) of these definitions are incorrect
d. All of these definitions are correct
Answers here:
Questions:
22.6.1. The Basel Framework includes the following traditional top-level financial risks: credit, market, liquidity, and operational risks. Climate change introduces climate risk drivers that impact banks via transmission channels. The impact of these risk drivers is ultimately reflected (i.e., manifest as consequences) in the traditional financial risk categories such as credit risk or operational risk.
A key question is whether ADDITIONAL categories should be added to the top-level financial risk typology (e.g., credit risk, market risk) in order to capture the unique impact(s) of climate risk drivers. According to the Basel Committee on Banking Supervision (BCBS), what is the consensus as to which financial risk categories should be ADDED to capture the impact of climate risk drivers?
a. There is not a consensus because different BCBS survey/workshop participants appended very different sets of financial risk categories
b. None, as the consensus is that the traditional, extant risk categories reflected in the Basel Framework are sufficient to capture climate-related financial risk
c. The consensus is that the traditional risk categories should be appended with the following financial risk categories: acute, chronic, and sentiment
d. The consensus is that the traditional risk categories should be appended with the following risk categories: microeconomic, macroeconomic, and geographic
22.6.2. Climate-related changes map ultimately to financial risk by way of climate risk drivers: the climate risk drivers impact banks directly and indirectly via causal chains (i.e., transmission channels). There is broad consensus that these drivers can be grouped into either physical risks or transition risks. In regard to these climate risk drivers, each of the following statements is true EXCEPT which is false?
a. Investor and consumer sentiment are transition risk drivers
b. Heatwaves, floods, and extreme precipitation are acute physical risk drivers
c. Rising sea levels, rising average temperatures, and ocean acidification are chronic physical risk drivers
d. Net-zero policies should not be classified as climate risk drivers but should be viewed (like other insurance policies) as mitigants or mitigation
22.6.3. Sally is an analyst working on the ESG criteria that will inform her firm's investment policy. As part of this work, she is building a glossary of climate-related terms. Her glossary includes the definitions below.
- Carbon intensity is a ration measure of carbon dioxide (CO2) emissions released per unit of some activity variable such as gross domestic product (GDP), output energy, revenue, transport etc.
- Climate can be defined as average weather, often a long-term average over years or decades
- ESG refers to a set of criteria that play a role in a company's operations or the investment decision-making process, and these criteria include environmental issues (e.g., climate change), social impacts, and/or governance.
- Feedback loops (which can be negative or positive) refer to a perturbation in one climate quantity that causes a change in a second quantity, but the second quantity's change leads to an additional change in the first quantity.
- Greenhouse gases (GHGs) include water vapor (H2O), carbon dioxide (CO2), nitrous oxide (N2O), methane (CH4), and ozone (O3)
- A stranded asset is an asset that suffers a write-down (or devaluation) prior to the end of its planned economic life due to transition
- A tipping point is a level of change beyond which a system cannot return to its initial (or prior) state even if the drivers are abated
a. There is exactly one glaring mistake
b. There are three glaring (or obvious) mistakes
c. Most (i.e., more than half) of these definitions are incorrect
d. All of these definitions are correct
Answers here:
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