Climate change poses challenges for financial stability: Central Bank of Oman

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Muscat: The effects of climate change are becoming increasingly apparent, more pronounced, and frequent in Oman and other countries, according to the Central Bank of Oman in its 12th Financial Stability Report (FSR) for 2024.

The Sultante of Oman has been subject to frequent tropical depressions and cyclonic storms that originate from the north Indian Ocean and the Arabian Sea.

Such storms occur between May and June and October – November.

The report added that climate change risks also pose significant concerns to the financial system, giving rise to both micro and macroprudential risks.

"The increase in extreme weather events underscores the urgent need to accelerate comprehensive climate risk management to protect economic stability and ensure sustainable growth. The impacts of climate change, such as weather events, can have profound implications for individual financial institutions (micro-prudential risk) as well as the stability of the entire financial system (macroprudential risk). These risks include physical risks (direct impacts from climate-related events), transition risks (risks associated with the transition to a low-carbon or green economy), and liability risks (legal or financial consequences arising from climate-related damages).

It is crucial for financial regulators, policymakers, and institutions to proactively consider, manage, and mitigate these risks to safeguard the stability and resilience of the financial system in the face of ongoing climate change, the report added.

"Financial institutions, especially in hydrocarbon-dependent countries like Oman, face an additional challenge in addressing the implications of transitioning to a greener and low-carbon economy. The shift towards reducing carbon footprints requires significant changes in the structure of the economy, which can have profound implications for the operations, investments, and overall business strategies of these institutions. This transition may involve a fundamental restructuring of industries, diversification of revenues for the government and businesses, and the adoption of sustainable practices."

As assessment of climate risks remains a challenge because of the difficult-to-predict shocks and significantly long-time horizon spanning over decades for modeling and analysis of transition risks, CBO is working on expanding its capacity to formally incorporate these risks in its assessment of financial stability.

The CBO has advised banks and financial leasing companies (FLCs) to refine their risk management policies and practices in line with the Basel consultative paper on ‘Principles for the effective management and supervision of Climate-related financial risks