2022 Climate Change Risk Assessment for Agricultural Lending

Sensitivity analysis focusses on illustrating the effect of changing one variable at a time, or a small set of closely related variables, while holding all else constant. * The work that banks did for these exercises fed into the 2023 Climate Stress Test, which is underway at the time of writing.3 T...

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Bibliographic Details
Published in:Reserve Bank of New Zealand Bulletin 2023-10, Vol.86 (7), p.0_1-17
Main Authors: ADAMS-KANE, Jonathon, Nicholls, Ken, Newman, Rebecca
Format: Article
Language:English
Subjects:
Agricultural banking
Agricultural lending
Agriculture
Banks
Beef
Climate change
Customers
Drought
Emissions
Farms
Loans
Meat processing
Prices
Risk assessment
Sensitivity analysis
Sheep
Variables
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Summary:Sensitivity analysis focusses on illustrating the effect of changing one variable at a time, or a small set of closely related variables, while holding all else constant. * The work that banks did for these exercises fed into the 2023 Climate Stress Test, which is underway at the time of writing.3 This is a full-fledged scenario stress test, with multiple climate and non-climate related variables changing together over time. * Across this exercise, analysis was limited to banks' dairy and sheep & beef portfolios. * To assess drought risk, banks estimated defaulted exposures for two different severities of drought: a one-year drought, and two years of drought back-to-back. The one-year drought resulted in 7 percent of banks' sheep & beef exposures and 8 percent of dairy exposures defaulting, and the two-year drought resulted in double those amounts, compared with around 3 percent in a baseline with no drought. * For emissions pricing, we prescribed four different emissions price levels and for each of these banks estimated the proportion of their agricultural borrowers that would be unprofitable, conditional on the same background assumptions. [...]the agriculture sector possibly faces greater risk from climate change. Drought Drought is a key area of focus for the climate change risk assessment as projections suggest that droughts are set to become longer, more freguent, and more severe due to climate change.5 Drought harms the agriculture industry as it causes a reduction in grass growth, fodder production, and cropping yields.
ISSN:1174-7943
1177-8644