Banks could face financial risks unless immediate climate action is taken, said the Bangladesh Bank (BB) in its first climate stress testing report published yesterday.

 The report by the BB's Financial Stability Department finds that banks would face higher loan losses under high-damage climate scenarios.

 The central bank said the financial system of Bangladesh may face significant challenges from climate-induced GDP slowdown in the coming years.

 To tackle this, it has developed a forward-looking climate stress testing framework and conducted comprehensive scenario-based stress testing on the banking sector of Bangladesh.

 The analysis linked GDP slowdowns caused by climate risks to increases in banks' credit risks and non-performing loans.

 The study finds that higher damage scenarios would consistently lead to greater loan loss, indicating significant vulnerability to climate-induced GDP shocks.

 "Immediate climate action is essential to minimise any plausible loss," said the BB in the report.

 The BB report said action should be taken in areas where climate-related risks are projected to become most pronounced.

 "This proactive and concerted approach would reduce the potential adverse impacts of climate change on financial stability."

 The study used econometric satellite models to estimate the link between GDP growth and the non-performing loan inflow ratio, and applied capital engine models to calculate loan loss reserves under different climate conditions.

 The report said sample banks tested showed rising loan loss requirements up to 2035, particularly under delayed transition and current policy scenarios with high chronic physical damage.

 The report advised banks to integrate climate risk considerations into their business strategies, adopt provisioning practices, and establish climate risk management frameworks. It also recommended improving climate-related data collection and reporting.

 Other recommendations included strengthening internal capacity on climate risk management, incorporating climate stress scenarios into internal analysis, and aligning business strategies with national climate goals.

 For supervisors, the report suggested developing guidance on climate risk governance, disclosure requirements, and credit risk management practices related to climate events.

 The report said the BB should not impose stricter capital requirements immediately. Instead, it recommended raising awareness of climate risks among banks and supervisors.