and models. 1 / 4 bis - central bankers'speeches we have to scale back the use of backward - looking models fed with historical data. looking back does not help, because this does not fully reveal the economic and financial implications of climate change in the future. furthermore, there are a lot of uncertainties when dealing with climate risks. we do not know when and how physical risks will materialise. neither do we know what climate policies will be implemented at what time. what we need is to set up different scenarios that could be the reality of tomorrow. so we have to turn to scenario analysis to guide us. the ngfs has developed a set of climate scenarios that we regularly update and enhance. these describe – both qualitatively and quantitatively – different futures for the world, ranging from a hot - house scenario to a net - zero future or the scenario of a fragmented world. by comparing these scenarios and what they mean in terms of economic developments, we can assess the risks – and these paint an unsettling picture. without timely and appropriate climate action, physical risks could lead to a global output loss of around $ 15 trillion by 2050. 4 this means that the financial cost of standing by and watching is close to the size of the euro area economy. 5 whereas, so far our scenarios have focused on the long - term impacts, the ngfs is currently preparing scenarios that zoom in on the next three to five years – a timeframe that is key to decision - making by both supervisors and many investors. in short, the ngfs climate scenarios illustrate the scale of climate risk to the economy and the financial sector. this information is relevant for us as central banks and supervisors, and can also provide a valuable signal for the wider financial markets. 2. 2 climate transition plans while global warming continues, the number of droughts and floods, hurricanes and wildfires will increase significantly over the next years. at some point, we will see tougher climate policies in place that will affect business models in many industries. it is crucial that corporates are prepared for these climate policies. otherwise, their business models, including their profitability, might be significantly affected. many market participants understand this transitional risk already. that is why they are increasingly calling for robust transition plans. these plans lay down the concrete steps and milestones on businesses'respective journeys to net zero. here, businesses can draw on frameworks such as the one provided by the tpt ( transition plan taskforce )

own risk models to assess risks as a basis for their capital requirements. these banks might underestimate the risks which might arise if economic activity unexpectedly worsens. this might, in turn, also lead to an underestimation of how much capital is needed to provide sufficient buffers against losses. there are, in fact, scenarios which could hit the financial system hard. one risk scenario is a faster - than - expected upturn in interest rates. for instance, risk premiums in international financial markets might increase unexpectedly. a rapid increase in interest rates would drive up short - term funding costs and hit particularly those financial institutions that have invested into low rate, fixed term assets. in germany, for instance, 44 % of housing loans are fixed - rate mortgages with a maturity of more than ten years, this number being up from 26 % at the beginning of 2010. 3 an abrupt increase in interest rates would put pressure on banks – their funding costs would go up, and their interest income would, initially, rise at a slower pace. an abrupt rise in interest rates would also send valuations down from their current high levels and thus cause losses. a second risk scenario is that of persistently low interest rates which would incentivize a search for yield. empirical results for the us show that risk - taking by banks intensifies if interest rates are low for long ( buch, eickmeier, and prieto 2014 ; dell ’ ariccia, laeven, and suarez 2017 ). also, life insurers and pension institutions would find it increasingly difficult to generate sufficient income to cover the returns that some of them have promised to pay. 2. resilience should be assessed against the ability of the financial system to deal with unexpected events the resilience of a financial system has two key components – buffers against risks and the risks themselves. notwithstanding difficulties with the definition of capital and liquidity buffers, these can be measured with a reasonable degree of certainty. on average, banks ’ capital ratios have increased since the crisis. within the euro area, the tier 1 capital ratio, which is measured in relation to banks ’ risk - weighted assets, increased from 8. 8 % in the year 2008 to 14. 7 % in 2016 ( cgfs 2018 ). 4 this raise has been achieved by a decline in total assets, a decrease in average risk - weights, and by a strengthening of banks ’ capital positions. measured relative to banks ’ total