Australia's banking sector will be more susceptible to big economic shocks as a result of lending losses from climate change, a new analysis suggests.
The banking watchdog has been working with the banks to assess how climate risks will affect the nation's financial institutions.
The good news is the big five do not expect severe stress from the lending losses they expect climate change will cause.
The bad news is those losses will make the banking sector more susceptible to economic downturns, and less willing to lend to climate vulnerable regions and industries.
ANZ, Commonwealth Bank, Macquarie Bank, National Australia Bank and Westpac took part in the climate vulnerability assessment, led by Australian Prudential Regulation Authority.
They were asked to model two scenarios: one where global emissions keep rising to 2050 and beyond, and another where rapid cuts kick in from 2030.
"Results showed that, for the climate scenarios assessed, physical and transition risks would increase overall bank lending losses in the medium to long term," the assessment found.
"However there was significant variability in lending losses across the banks."
For the banks' mortgage portfolios, results ranged from no lending losses being directly attributable to the climate scenarios, to lending loss rates up to three times higher than historic averages by 2050.
For business lending, overall lending losses arising from transition risks rose substantially under both scenarios, but were higher under a future of rapid emissions cuts from 2030.
"Overall, the modelled increases in lending losses arising from climate change would be unlikely to cause severe stress to the banks," the assessment found.
"However, the potential for higher losses arising from climate change could lead to the banking sector being more vulnerable to future economic downturns."
APRA Deputy Chair Helen Rowell said it was a valuable exercise, and the banking watchdog will consider how gains might be applied to the other industries it regulates, such as insurance and superannuation.
"Despite the high profile of climate change, climate risk management and modelling remain emerging areas of expertise, in part due to uncertainty about how the risks will play out decades into the future, and how these risks are incorporated into financial models," she said.
"By undertaking this exercise, participating banks have needed to develop new tools, techniques and data sources related to climate risk analysis.
"Differences in the modelling approaches and assumptions used by the banks, which produced a wide variation in results, also point to areas where further exploration and development is needed. This, however, is a good start."
APRA undertook the assessment on behalf of the Council of Financial Regulators, which includes the Australian Securities and Investments Commission, the Reserve Bank of Australia, and The Treasury.
