Financial Services Agency Releases Second Climate Scenario Analysis for the Banking Sector
Tokyo, Japan – July 29, 2025 – The Financial Services Agency (FSA) of Japan today announced the publication of its second report on climate-related scenario analysis for the banking sector. This comprehensive analysis, titled “Second Climate Scenario Analysis [Banking Sector] (English Translation),” represents a significant step forward in the FSA’s commitment to understanding and mitigating the financial risks associated with climate change.
The report, released at 2:00 PM JST, builds upon the foundational work of the first scenario analysis, delving deeper into the potential impacts of various climate scenarios on Japanese banks. The primary objective of this initiative is to enhance the resilience of the financial system by providing banks with a robust framework for assessing and managing climate-related risks, both physical and transitional.
Key Focus Areas and Insights:
The second scenario analysis explores a range of plausible future climate pathways, examining how these might affect banks through various channels. These channels include:
- Credit Risk: The analysis likely assesses how physical climate impacts (e.g., increased frequency of natural disasters) and transitional risks (e.g., policy changes, technological shifts, and market sentiment related to decarbonization) could affect the creditworthiness of borrowers across different sectors. This could involve evaluating the potential for increased loan defaults or a decline in the value of collateral.
- Market Risk: The report may also consider how changes in asset valuations, driven by climate-related factors, could impact banks’ investment portfolios. This could include shifts in the value of equities, bonds, and other financial instruments sensitive to climate transition or physical damages.
- Liquidity Risk: An examination of how climate events might influence the availability and cost of funding for banks is also a probable focus. For instance, a severe natural disaster could disrupt economic activity, impacting deposit flows or the ability of financial institutions to access wholesale funding.
- Operational Risk: The analysis may also touch upon the operational resilience of banks, considering the potential for disruptions to critical infrastructure or business processes due to extreme weather events.
Enhancing Financial System Resilience:
By undertaking and publishing this detailed scenario analysis, the FSA aims to achieve several crucial objectives:
- Promoting Proactive Risk Management: The report encourages Japanese banks to proactively identify, assess, and manage their exposure to climate-related risks, rather than reacting to events after they occur.
- Fostering Transparency and Disclosure: The publication of this analysis contributes to greater transparency within the financial sector regarding climate-related risks and the strategies banks are employing to address them.
- Strengthening Supervisory Oversight: The insights gained from this analysis will inform the FSA’s supervisory approach, enabling a more effective assessment of the climate risk management capabilities of individual institutions.
- Contributing to Global Best Practices: The FSA’s continued engagement in climate scenario analysis aligns with international efforts to promote sustainable finance and build a more resilient global financial system.
The English translation of the report is a welcome development, facilitating greater understanding and engagement from international stakeholders, including investors, other financial regulators, and researchers. This initiative underscores Japan’s commitment to integrating climate considerations into its financial policy and regulatory framework, promoting both economic stability and a sustainable future.
This release signifies a continued commitment by the FSA to guide the banking sector through the evolving landscape of climate-related financial risks, ultimately contributing to a more robust and sustainable financial ecosystem.
「気候関連リスクに係る第２回シナリオ分析【銀行セクター】（英訳）」について公表しました。
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金融庁 published ‘「気候関連リスクに係る第２回シナリオ分析【銀行セクター】（英訳）」について公表しました。’ at 2025-07-29 14:00. Please write a detailed article about this news in a polite tone with relevant information. Please reply in English with the article only.