12 July 2024
Secretariat of the Basel Committee on Banking Supervision
Bank for International Settlements
CH-4002 Basel, Switzerland
Japanese Bankers Association

JBA comments on the BCBS Discussion Paper: “The role of climate scenario
analysis in strengthening the management and supervision of climate-related
financial risk”
Dear Basel Committee members:
The Japanese Bankers Association 1 (JBA) appreciates the opportunity to provide our comments on the BaselCommittee on Banking Supervision’s (BCBS) Discussion Paper: “The role of climate scenario analysis instrengthening the management and supervision of climate-related financial risk” (the “Discussion Paper”)
released on 16 April 2024.
The JBA supports the BCBS’s efforts to incorporate climate scenario analysis into effective management andsupervision of climate-related financial risks. While recognising climate change as a critical issue, we also
acknowledge that there is currently no globally established methodology for assessing such risks. Additionally,
the pilot exercise conducted with the Financial Services Agency of Japan and the Bank of Japan is also
positioned as an attempt to continuously improve analysis methods. Considering these, we believe there areseveral aspects to keep in mind as discussions progress.
We hope that our comments will contribute to further discussions at the BCBS.

Question1
How does the role of CSA vary based on the objectives listed above, and are there
other prudential objectives where CSA could be relevant?
・The role of CSA varies based on the objectives listed below. Given these roles, the accuracy of CSA
calculation results and a certain degree of standardisation through thoughtful discussions with the banks
are required in the future.
a. Risk identification
・ The role involves sector-specific and regional risk assessments and their comparison.

The Japanese Bankers Association is the leading trade association for banks, bank holding companies and bankers associations inJapan. As of June 1, 2024, JBA has 114 Full Members (banks), 3 Bank Holding Company Members (bank holding companies), 74
Associate Members (banks & bank holding companies), 49 Special Members (regionally-based bankers associations) and one SubAssociate Member for a total of 241 members.

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c. Internal and supervisory capital and liquidity assessments
・ The role involves quantitatively assessing the likelihood of impacts based on scenarios over a shortterm time horizon that assume sudden stress cases.
d. Assessment of business model resilience and business strategy building
・ The role involves assessing impacts based on both a long-term outlook of business structural changes
and resilience to short-term stress cases.
・

Other prudential objectives where CSA could be relevant include using the scenario analysis results forexternal disclosure to aid investors in assessing each bank's approach to climate change and engaging
with borrowers using CSA to support the decarbonisation of their portfolios.

・Each climate scenario may have a variety of different usages—a specific CSA may be motivated by one
particular usage but provide insights into areas not originally envisaged. As such, CSA might beconsidered more “exploratory” than traditional established scenario exercises that are mature in the risk
management field.

Question2
What are the key challenges in the application of CSA and how can they be overcome?
・Key challenges and potential solutions include the following points:
Key Challenges
・ The elements of scenarios published by scenario builders are not comprehensive and there arevariations in the disclosed information from borrowers.
・ It is difficult to evaluate and verify the appropriateness of the results because there is no establishedcommon analysis method for comparison between banks.
・ There is no common understanding about the potential impact of climate-related shocks on
macroeconomic/sectoral variables and credit risk, making it difficult to create scenarios that can becompared across banks and applicable to the conventional risk management framework.
Measures・ Further research and intense communication among banks' internal stakeholders would be effective toprepare in-house scenarios.
・ Additionally, comprehensive publication of scenario elements by scenario builders would contribute toeffective preparations.
・ We expect regulators to continuously take the lead in providing policy support to enhance data
availability and sharing, accumulating knowledge and experience among research institutions,
regulators, and relevant international frameworks to leverage them for improving the validity of
scenarios and methodologies.
・ In the future, it is desirable for the BCBS to establish standard methods for processing and developing
scenarios in the form of guidance, as well as standardising analysis methods in CSA. It would also be2

desirable to publish benchmarks that allow comparison with other banks (quantitative statistics such as
the median EBITDA decline rate for each sector) to assess financial impacts and finetune internalsimulation models by recognising the relative leniency and severity from simulations of other banks.
However, given that evaluation models and tools are still in development, hasty standardisation shouldbe avoided. It is essential to carefully continue discussions with the banks.

Question 3
What are the key areas where CSA methodologies and capabilities need to be further
developed to be useful and relevant for the different objectives listed in this paper?
・ The key areas where CSA methodologies and capabilities need to be further developed are as follows: Develop the CSA methodology for short-term scenarios that can be used to internally evaluate capital
adequacy. For example, it is necessary to develop a method related to how to avoid duplicative
assessment of existing credit risks (other than climate change) and how to capture the probability of theoccurrence of climate scenarios.
 Understand the transmission channel of climate-related variables to macroeconomic/sectoral variables.
 Study the change in the sensitivity of credit risk to macroeconomic/sectoral variables after considering
climate-related risks.
 Establish a consistent evaluation method for the impact of transition risk and physical risk.
 Ensure the validity of the CSA exercise by adjusting it to a scenario that takes into account important
policies of national governments, such as energy policies, which are not necessarily reflected in thecurrent scenario.
 Develop a financial simulation model that takes into account the impact of the company's supply chain.

Question 4
Are the key features listed above appropriately calibrated for a range of CSA
exercises, and should other features be considered?
・ We recognise some banks implement CSA taking into account the features mentioned in the paper.
・ Regarding other features, comparisons between banks cannot be made due to the absence of establishedanalysis methodology. Therefore, “comparability” should also be taken into consideration.

Question 5
How does the design of CSA exercises vary depending on the objectives? Pleaseelaborate on the main usage-specific considerations for each of the differentobjectives.
・ For the “risk identification,” flexible scenario designs (e.g., time horizon, severity of scenarios) withseveral simplified assumptions to adjust according to purposes of the CSA could be useful for identifying
risk drivers and understanding highly uncertain climate-related risks. Using a long-term time horizon
scenario is preferable for capturing sectoral and regional structural changes. In this context, it is anticipatedthat scenario builders will further expand their published scenarios to establish specific scenarios for eachsector and region.
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・ For the “risk management processes,” “internal and supervisory capital and liquidity assessments,” and“assessment of business model resilience and business strategy building,” an analysis based on firm-agreed
scenarios to reflect climate risks could be effective in integrating climate risks into the conventional risk
management framework. At the same time, scenario analysis based on several narratives could be effectivein understanding the impact of different levels of climate risk mitigation measures.
・ Additionally, for the “assessment of business model resilience and business strategy building,” the aim is
to assess sudden stress scenarios; thus, the implementation of rigorous scenario settings over a short-term
timeframe is necessary.
・ Other considerations on the “main usage-specific considerations” are as follows:
Time horizons
・ Compared to short-term analysis, long-term analysis has even higher uncertainty. At present, long-term
scenarios may be utilised more for strategic planning and risk management of banks rather than for
quantifying potential losses.
・ For short-term scenarios, consideration of occurrence probability is necessary to make the relationshipwith the internal capital adequacy assessment (ICAAP) consistent; for medium to long-term scenarios,
in terms of consideration of strategy, certain standards on how to reflect changes in the balance sheet(portfolio) are necessary. The frequency of updating analysis should also be considered from theperspective of strategy continuity.
Granularity
・ In financial impact simulations based on rating transitions, model risk increases due to small sample
sizes and differences in smoothing methods for transition rates. Therefore, focusing on model
governance is essential.
Balance sheet assumptions
・ For utilising scenario analysis in strategy formulation, the analysis should be based on changes in
exposure by sector; however, it is difficult to ensure and evaluate the feasibility of such changes.
Therefore, it is necessary to use different balance sheets for different purposes, such as a dynamicbalance sheet for internal management and a static balance sheet for disclosure.

Question 6
What additional usage-specific considerations are relevant for each of the different
objectives of CSA listed in this paper and why?
・ Attention should be paid to the complexity of the analysis. Depending on the purpose of the analysis,models may become more complex; however, the more complex the analysis, the greater the burden ofimplementation, and the more likely it is to encounter challenges in model risk related to persuasivenessand stability. Therefore, it is necessary to consider the complexity appropriate to the purpose.

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Question 7:
Which scenario and scenario features are used for the different objectives listed (ieinternally developed, those from scenario builders or a combination of the two)?
・ Examples of two Japanese banks are as follows:
Bank A・ NGFS scenarios are mainly used and are complemented by some parameters from IEA scenarios. The
purpose of their CSA is to assess business resilience or identify risks.
Bank B・ For risk management purposes, long-term scenario analysis for both transition and physical risks basedon publicly available scenarios is conducted. Methodologies for short-term transition risk analysis
based on in-house scenarios are currently designed to capture the temporal shock during the transition
phase.
・ For strategy-building purposes, publicly available long-term scenarios are referenced.
・ For any of the objectives listed in the paper, it is not easy for each financial institution to develop
appropriate scenarios. Especially, medium to long-term climate change scenario analysis requires many
parameters due to the complexity of the spillover pathways and the need to update the assessment. Fromthe perspective of ensuring comparability between banks, it is desirable to use scenarios provided byscenario builders as much as possible. However, given that the development of scenarios by these agencies
is not fully advanced at this time, combining them with those developed internally is also an option.

Question 8:
What features and measures could be adopted in the future to enhance the utility ofcurrently available scenarios (eg NGFS, IEA, IPCC)?
・ To advance scenario analysis of physical risk, it is necessary to enhance corporate disclosure data, such as
risk assessments based on property data owned by individual companies and their financial impacts, aswell as the reflection of supply chain impacts. However, this will require a significant amount of efforts
and time. A practical approach is to initially disclose scenario data that appropriately reflects physical risk
and supply chain impacts by region and sector in NGFS and other scenarios, and then continuously upgrade
this approach.
・ For upgrading the approach and enhancing the use of scenarios, considering the following points isdesirable for the BCBS, if necessary, by engaging with other relevant authorities:
 Establish a standard method for processing and developing scenarios from specific scenario buildersaccording to motivation.

 Indicate the occurrence probability of each scenario from NGFS and IEA. This would enable banks todiscern which purposes of risk management these scenarios can be utilised for, and allow for theadjustment of scenarios based on each bank's outlook. However, it should be noted that there is an5

evolving understanding of feedback mechanisms between climate events; what appears implausible
today may not be so going forward. Therefore, there is potential value in stretching beyond plausibility.
 Define the required level of investment in low-carbon technologies to achieve decarbonisation goals
and clarify the impact of these technological developments on macroeconomic and sectoral variables
for conducting analysis, particularly for transition risks in energy-demand sectors except energy andutilities.
・ Within this context, analysing the wide-ranging impact of climate change on economic and social systems,
such as economic growth, employment, and health is important for developing more practical measuresand policies. Scenarios should also reflect technological advances and changes in national policies.

Question 9:
What alternative or novel approaches could supervisors consider for CSA and how
might these be used for prudential purposes?
・ As an alternative approach, in addition to CSA conducted by each bank, it could be proposed that thesupervisors carry it out collectively. In that case, standardising the calculation methods would make itpossible to compare results across banks from a prudential perspective.

Question 10:
How could the effectiveness and efficiency of supervisory exercises be improved?
・ Firstly, since CSA is still in its very nascent stage, regulators should not use CSA outputs for banksupervision under the assumption that they are sufficiently accurate and reliable. CSA would need to meetseveral key conditions before it could be informative to quantitative capital planning, such as maturationof data and tools, improvements in knowledge on financial risk transmission channels, and inclusion ofrisks that could plausibly materialise in the near-term.
・ To enhance the utilisation of CSA by banks, the BCBS and other relevant authorities may consider
examining and addressing the following aspects without compromising motivation:
 Develop a common database usable for all banks.
 Disclose benchmarks (statistics) to enable objective evaluation of scenario analysis results.
 Specify the assumptions for the CSA model, such as market and industry trends, common
understanding of policies and regulations, and the level of technological advancement.
 Clarify the transmission channels, taking into consideration inter-industry relations and the current
adoption of energy-saving technologies.
 Conduct further and careful research on the relationship between macroeconomic shocks and climatederived shocks.
 Reinforce standardised CSA consistency across banks by close coordination between home and hostsupervisors to apply CSA for all entities within the group. Since group-level committees andgovernance will dominate the strategic direction of the firm, with a multi-decade strategic focus on
climate change, it is important that CSA is applied at the group level. The results will ultimately flow
down to individual entities. This is particularly relevant for business model resilience and businessstrategy.
6 Develop policies to enhance data availability and improve the data collection process. AI and big data
may accelerate such efforts.
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We thank the BCBS again for the opportunity to comment on the Discussion Paper and hope our comments
will contribute to further consideration in the BCBS.
Yours faithfully,Japanese Bankers Association7