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Question 16

As climate change poses new financial risks to a central bank’s monetary policy operations, the bank decides to adapt operations with NGFS guidelines. Because the central bank does not include climate change in supervision practices, the bank consults subject matter experts (SMEs) to develop a proposal for central bank action on climate change. After completing the risk assessment, SMEs recommend the bank incorporate microprudential and macroprudential measures to embed climate change into supervision practices.

Which action are SMEs likely to recommend?

Conduct climate stress tests with standardized policy scenarios and feedback loops as a microproduential measure.

Increase internal resources and establish an external review process for climate risk integration as a macroprudential measure.

Adhere to disclosure best practice when integrating climate risk by following TCFD disclosure recommendations as a microprudential measure.

Implement the widely adopted macroprudential measure of a procyclical capital buffer to increase equity capital during periods of carbon-intensive credit.

Correct Answer: A

Conducting climate stress tests with standardized policy scenarios and feedback loops is likely a microprudential measure. This action directly embeds climate change into the bank's supervision practices by assessing financial institutions' resilience to climate risks under different hypothetical scenarios. Stress tests are a fundamental tool for evaluating the stability of individual banks and ensuring they can withstand adverse conditions, including those related to climate change.

Discussion

goodformeOption: C

Microprudential Measures : on disclosure, the Bank expects firms to consider implementing disclosures on climate risk beyond mandatory requirements, suggesting TCFD rec-ommendations as a guideline.

xdudeOption: C

B is micro prudential measure and not macro. So B is wrong. C is the most appropriate one

Ramki_Looking_For_AnswerkeyOption: A

As per GARP question bank, it should be A

ShawnLearningOption: A

SCR Book, Chapter 4.1.1, p.85: "Stress tests are another micro-and macroprudential tool at the disposal of central banks. " Why is A incorrect?

Shweta_lOption: C

The answer should be C.

MatMat2023Option: C

SME recommendation is about both micro AND macro measures. None of the answers is correct. C is the most suitable because central banks and regulators are moving towards the direction of adopting TCFD disclosure recommendations, but they are about micro and NOT macro

Dunjeon_MasterOption: C

C is correct

KarnitschnigOption: C

This was poorly worded. B is not macro

A2240Option: B

Review is the most important part of supervision