Module: | MODULE B: RISK MANAGEMENT
Q424: Consider the following statements regarding the integration of Climate Risk into the Integrated Risk Management (IRM) framework, as per the recent Reserve Bank of India (RBI) guidelines for 2025-2026:
1. The RBI strictly defines climate-related financial risks exclusively as Reputational Risk, exempting them from the operational risk capital calculation framework.
2. Physical risks, such as operational disruptions and damage to bank assets caused by extreme weather events, must be explicitly integrated into the bank's operational risk scenario analysis.
3. Banks are mandated to incorporate climate risk assessments into their Internal Capital Adequacy Assessment Process (ICAAP) to ensure long-term resilience against environmental shifts.
Which of the statements given above is/are correct?
2. Physical risks, such as operational disruptions and damage to bank assets caused by extreme weather events, must be explicitly integrated into the bank's operational risk scenario analysis.
3. Banks are mandated to incorporate climate risk assessments into their Internal Capital Adequacy Assessment Process (ICAAP) to ensure long-term resilience against environmental shifts.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: Under the recent RBI guidelines for integrated risk management (2025-2026), climate-related financial risks are NOT treated exclusively as reputational risks.
They are formally recognized as transverse risks that manifest deeply across Credit Risk (default due to crop failure), Market Risk (stranding of fossil fuel assets), and explicitly Operational Risk (damage to branches). They are not exempted from capital assessment frameworks.
Statement 2 is correct: Physical climate risks—which entail direct loss due to extreme weather phenomena like floods or cyclones—directly impact a bank's physical assets and business continuity.
Therefore, RBI mandates that these factors be heavily integrated into the operational risk scenario analysis framework under the "Damage to Physical Assets" and "Business Disruption" categories.
Statement 3 is correct: A cornerstone of the emerging regulatory mandates is ensuring future resilience.
Banks must now explicitly incorporate climate risk scenarios into their overarching Internal Capital Adequacy Assessment Process (ICAAP) to ensure they are holding sufficient internal capital buffers against both physical and transition climate risks.
Therefore:
Option A is incorrect because Statement 1 is false.
Option B is correct as both Statement 2 and 3 are true.
Option C is incorrect because Statement 1 is false.
Option D is incorrect because Statement 1 is false.
They are formally recognized as transverse risks that manifest deeply across Credit Risk (default due to crop failure), Market Risk (stranding of fossil fuel assets), and explicitly Operational Risk (damage to branches). They are not exempted from capital assessment frameworks.
Statement 2 is correct: Physical climate risks—which entail direct loss due to extreme weather phenomena like floods or cyclones—directly impact a bank's physical assets and business continuity.
Therefore, RBI mandates that these factors be heavily integrated into the operational risk scenario analysis framework under the "Damage to Physical Assets" and "Business Disruption" categories.
Statement 3 is correct: A cornerstone of the emerging regulatory mandates is ensuring future resilience.
Banks must now explicitly incorporate climate risk scenarios into their overarching Internal Capital Adequacy Assessment Process (ICAAP) to ensure they are holding sufficient internal capital buffers against both physical and transition climate risks.
Therefore:
Option A is incorrect because Statement 1 is false.
Option B is correct as both Statement 2 and 3 are true.
Option C is incorrect because Statement 1 is false.
Option D is incorrect because Statement 1 is false.