Sustainability and Climate Risk (SCR) — Question 28

The climate risk team at a global bank works on a sustainability and climate risk report for a forthcoming company strategy meeting. The meeting will focus on bank goals to achieve net zero GHG emissions by 2050. Bank leaders will discuss potential risk exposures the bank may face, as well as possible financial systemic effects.
Which of the following is an example of how systemic climate risk can translate into liquidity risk for the bank?

Answer options

• A. High level of deposit withdrawals from households and corporations after a hurricane severely affects a country.
• B. Sea level rise causes coastal property prices to decrease, which leads to real estate losses for the bank.
• C. Insurers significantly increase premiums due to climate-related risks and leave the bank without coverage, amplifying risks to financial stability.
• D. Sector-wide asset stranding for the financial sector increases due to climate pressures, which affects bank revenue and profits as cash flow decreases.

Correct answer: A

Explanation

Answer A is correct because high deposit withdrawals can reduce the bank's available liquidity, especially after a disaster like a hurricane. The other options reflect various risks associated with climate change, but they do not directly demonstrate how systemic climate risk can lead to immediate liquidity challenges for the bank.