Banks face stress tests for 'Westminster under water' climate crises

Sam Woods, head of the UK's financial stability watchdog, says the sector is not adequately prepared for climate calamities in major financial hubs

Scenarios such as the threat of 'Westminster under water' should be looked at by financial regulators, a leading civil servant says. PA

Britain’s banks should face stringent new tests to see how they would perform after a climate catastrophe that knocks out a global financial hub, a leading civil servant said.

Sam Woods, head of the UK’s stability watchdog, said the banking sector needs more preparation against a “very large climate event” that would result in a major shift in government policy and send shock waves through markets in Paris, New York and London.

He raised the possibility of “Westminster under water” as such a scenario that could trigger large-scale losses for the financial services industry.

Mr Woods is the head of the Bank of England’s Prudential Regulation Authority, an organisation established by the Bank of England in the aftermath of the 2008 financial crisis.

He warned that the UK financial sector has only proved its resilience against the “slow burn” effects of climate change.

“Imagine Westminster under water – a really extreme thing that made policy shift in a very dramatic way,” Mr Woods said in an interview with The Observer.

“I know there’s terrible climate events happening around the world all the time, but I’m talking about one that will lead to a dramatic change in policy from government, and governments … [and have a] very sudden effect in financial markets.

“We haven’t tested that – we’ve tested the slow burn thing of your risk building through time.”

The PRA has not confirmed plans to repeat its first climate stress tests, which last year examined banks' resilience in the face of rising temperatures and sea levels.

The regulator said in a worst-case scenario test, up to 45 per cent of UK mortgages could fail in places exposed to climate change, while finance sector companies would see a 15 per cent drag on annual profits.

The bank tested three scenarios for an economy tackling climate change by heading towards net zero emissions in 30 years – early co-ordinated action, late disorderly action and no action.

The report found that climate risks will become a persistent drag on banks’ and insurers’ profitability going forward – likely worth £334 billion across the UK’s 19 largest banks and insurers by 2050 under the worst case scenario.

It comes as the UK was criticised for watering down its net zero strategy.

Prime Minister Rishi Sunak last week announced plans including a five-year delay in banning petrol and diesel cars, and made changes to the shift away from gas boilers to spare hard-pressed households from the cost of green commitments.