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Mission to Mars: Bad science fiction

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  Published in Science and Technology on Wednesday, October 22nd 2025 at 4:00 GMT by The Financial Times
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UK banks face a new wave of risk: climate, rates and regulatory tightening

A recent report from the Financial Times highlights that the UK banking sector is confronting a convergence of pressures that could reshape its risk‑management landscape over the next decade. The article argues that while interest‑rate risk has been the dominant concern for most banks, climate‑related risks—particularly the transition and physical risks tied to the UK’s net‑zero ambitions—are now beginning to be integrated into prudential stress tests and capital buffers. The piece also notes that regulatory bodies are tightening the rules around capital adequacy, liquidity and the disclosure of environmental exposures, pushing banks to adopt more sophisticated modelling techniques and to rethink their asset‑allocation strategies.

Interest‑rate risk and the looming “rate shock”

The article opens with a discussion of the Bank of England’s recent decision to keep the policy rate on an upward trajectory, citing inflationary pressures and a need to temper growth. With the Bank of England raising rates by 0.5 % last month, the article warns that a “rate shock” scenario—where rates rise more quickly or more steeply than expected—could erode loan balances and squeeze banks’ profitability. It references the Prudential Regulation Authority’s (PRA) 2024 prudential framework update, which now includes a “rate‑shock” scenario as part of the baseline for the UK banks’ annual stress tests. The author notes that while the test focuses on loan‑loss provisions and capital buffers, the impact on deposit rates and borrower defaults is being re‑examined, especially in the context of the UK’s high‑cost housing market.

Climate risk enters the capital calculus

In a significant shift, the FT article stresses that climate risk is no longer a peripheral issue. The Bank of England’s “Climate‑Related Financial Disclosures” guidance, issued in March 2024, now mandates that banks assess the transition risk associated with the UK’s 2050 net‑zero target, as well as the physical risks posed by extreme weather events. The article cites the FCA’s “Green Finance Strategy” as a complementary framework that encourages banks to incorporate environmental, social and governance (ESG) factors into their credit risk assessments. It reports that several of the UK’s largest banks—HSBC, Barclays and Lloyds, for instance—have already started embedding climate‑scenario analysis into their risk‑management systems, and that the PRA is now considering an optional “climate‑stress test” to complement the existing rate‑shock scenario.

The piece explains that the transition risk assessment will examine how regulatory changes, market shifts and new technologies could affect the creditworthiness of borrowers, particularly in the energy, transport and construction sectors. Physical risk analysis will model potential losses from extreme events such as floods or heatwaves that could damage collateral and disrupt supply chains. The article highlights that banks’ capital requirements will be adjusted based on the estimated climate‑risk exposure, potentially leading to higher capital charges for borrowers in high‑carbon sectors.

Capital buffers, liquidity and disclosure obligations

Beyond the specific scenarios, the article details how the PRA’s 2024 prudential updates will enforce tighter capital buffers. The capital adequacy ratio (CAR) ceiling will be tightened to 15 % for banks that fail to meet a baseline climate‑risk threshold, while the liquidity coverage ratio (LCR) will be adjusted to account for potential rapid withdrawals during a “rate shock” scenario. In addition, the FCA is rolling out a new “Climate‑Related Disclosure” requirement, urging banks to publish annual climate‑risk profiles that include the methodology, data sources and the sensitivity of capital to climate scenarios.

The article also references the UK Treasury’s “Future of Banking” report, which outlines a broader strategy to align financial stability with the UK’s environmental targets. According to the Treasury, the goal is to ensure that banks are not only resilient to physical and transition risks but also contribute to the decarbonisation of the economy by channeling capital into low‑carbon projects. The Treasury’s framework includes a “green financing” initiative, encouraging banks to issue green bonds and to provide preferential rates for green loans.

Implications for consumers and investors

While the article focuses on institutional risk, it concludes by considering the impact on consumers and investors. A higher capital charge on high‑carbon loans could translate into higher borrowing costs for businesses that rely on fossil‑fuel‑heavy activities, which might ripple down to consumers in the form of higher prices or reduced availability of certain services. Conversely, the shift toward green financing could spur investment in renewable infrastructure, potentially creating new job opportunities and supporting the UK’s net‑zero ambitions.

Investors, the piece notes, should watch for how banks’ climate risk disclosures influence credit ratings and market perception. Banks that demonstrate robust climate risk frameworks may benefit from a lower risk premium, while those that lag behind could face increased scrutiny from rating agencies and ESG-focused investors.

Moving forward

In its closing remarks, the FT article calls for a coordinated effort between banks, regulators and investors to manage the dual risks of rising rates and climate change. It argues that the UK’s financial system must evolve to embed resilience not only in the face of monetary policy shocks but also in the transition to a sustainable economy. The article suggests that the next round of stress tests, scheduled for early 2025, will provide a clearer picture of the sector’s preparedness, but it warns that the road to resilience will require significant investment in data infrastructure, analytical capability and regulatory compliance.