The test will scrutinise the resilience of the country’s biggest banks and insurers to stresses from the shift to a net zero-carbon economy over coming decades as well as the impact of extreme weather.
“The end result will be more robust management of climate related financial risks across the sector,” BoE Governor Andrew Bailey said in a statement.
The results of the test are due to be published in May 2022.
The test is based on three scenarios that span 30 years: early action by governments to deal with climate change, action that is late, and taking no additional action.
Each scenario will be applied to two main risks: physical such as fires and floods due to temperature changes, and risks from transitioning to a more climate-friendly business that could bring sudden changes in asset values.
“This is the first time we are testing both banks and insurers to allow us to capture interactions between them and understand the risks presented by climate change across the financial system,” the BoE said.
The exploratory exercise will not be used by the BoE to set capital requirements, but will shape how regulators do their work and help financial firms to model climate risks better. Reporting by Huw Jones; Editing by William Schomberg