ABSTRACT
In the United Kingdom, the Bank of England is responsible for maintaining the stability of the financial system. This chapter examines the channels via which climate change and policies to mitigate climate change could affect central banks' ability to meet their financial stability objectives. It considers the potential role of central banks and financial regulators in assessing and mitigating climate-related financial risks. There are two main types of climate-related risks that can affect the value of assets held by the financial sector: physical risks, which arise from climate change itself; and transition risks, arising from the transition to a low-carbon economy. Central banks and financial regulators could potentially play several types of roles in mitigating risks associated with asset stranding. A key challenge in conducting a climate-related stress test lies in identifying a relevant scenario in which the financial sector is expected to suffer a large financial loss.
