This refers to the guidelines on stress testing issued vide FSD Circular No. 01 dated September 01, 2020.
State Bank of Pakistan (SBP), in pursuance of its goal to further strengthen the risk management capacity of regulated financial institutions (banks, DFIs and MFBs), has decided to introduce additional set of shocks covering climate-related risks. Consequently, Guidelines on Climate Stress Testing (Annexure-1) are being rolled out.
Lately, climate change has emerged as a significant challenge for the domestic economy and the financial system. Therefore, the guidelines provide scenarios on climate-related single factor shocks for physical and transition risks for the SBP regulated financial institutions (FIs). Moreover, the sample Domestic Systemically Important Banks (D-SIBs), as identified under D-SIBs Framework 2018, are now required to incorporate climate-related risks into their annual scenario analysis i.e., Macro Stress Testing (MST) exercise. The guidance will enable the FIs to better gauge the impact of climate-related risks on their lending portfolio and financial position. Accordingly,
- The regulated FIs shall conduct climate stress tests in addition to the exercises being carried out under FSD Circular No. 01 dated September 01, 2020.
- Climate stress testing (single factor) will be conducted by the regulated FIs, based on end-December data, by second quarter of following year. However, the first iteration may be conducted by end of Q3CY26, based on end-December 2025 data.
- The sample D-SIBs shall conduct annual MST exercise based on data as of December 31 (audited annual financials) and shall also incorporate climate-related risks in the scenarios. The results shall be included in the relevant section(s) of ICAAP document and submitted to SBP by June 30 of the following year.
The SBP, as part of its supervisory process, will regularly conduct its own in-house climate stress testing exercises and, if required, may engage with the regulated FIs for any risk mitigation measures/contingency plans based on the outcome of these exercises. The SBP supervisory teams may also review the climate stress testing framework and processes of the regulated FIs.
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Enclosures:
Annexure-1: Guidelines on Climate Stress Testing