Post by sweetpea33 on Jan 24, 2024 1:54:43 GMT -5
Only one of nine banks studied is looking at a risk management time horizon longer than five years. Two others are looking longer term with respect to climate risk, but not for more conventional risks such as credit risk or market risk. Part 2: Relationship banking and climate policy relevant sectors If they do have to confront a disorderly carbon transition, banks that have deep relationships with high-carbon firms will face a difficult trade-off. They either will have to refinance customers whose credit quality suddenly has deteriorated or stop lending to them.
In the first case, they might avoid losses in the short term but end up increasing their long-term transition risk. Alternatively, banks could abruptly terminate lending relationships with certain Email List borrowers (by declining to roll over credit facilities). This would destroy value on two levels. First, for some banks, it would lead to a substantial loss of customers and drop in market share. As one former JPMorgan banker put it, "It would be very damaging to the relationship with a client if a bank said it wouldn’t roll over a revolver, particularly if other banks continued to extend credit."
Such abrupt action would destroy the informational value of the lending relationship. The way to avoid this value destruction — and mitigate the worst impacts of climate change — is for banks to help clients gradually and strategically reduce their risk through transition plans aligned with the objectives of the Paris Agreement. This means that banks and their clients need to set net-zero targets that aim to decarbonize most sectors by 2040, and the whole economy by 2050.
In the first case, they might avoid losses in the short term but end up increasing their long-term transition risk. Alternatively, banks could abruptly terminate lending relationships with certain Email List borrowers (by declining to roll over credit facilities). This would destroy value on two levels. First, for some banks, it would lead to a substantial loss of customers and drop in market share. As one former JPMorgan banker put it, "It would be very damaging to the relationship with a client if a bank said it wouldn’t roll over a revolver, particularly if other banks continued to extend credit."
Such abrupt action would destroy the informational value of the lending relationship. The way to avoid this value destruction — and mitigate the worst impacts of climate change — is for banks to help clients gradually and strategically reduce their risk through transition plans aligned with the objectives of the Paris Agreement. This means that banks and their clients need to set net-zero targets that aim to decarbonize most sectors by 2040, and the whole economy by 2050.