Featured Product

    Luiz da Silva of BIS on Role of Central Banks to Address Climate Risks

    May 23, 2019

    The BIS General Manager Luiz Awazu Pereira da Silva spoke at the Conference of the Central Banks and Supervisors Network for Greening the Financial System (NGFS) in Paris. During his speech, he briefly examined the increasing impact of climate change risks on the insurance business and highlighted that support and guidance from central banks, regulators, and supervisors are necessary to help explore the many ways of financing the adaptation to a lower-carbon economy. Finally, he outlined the role that central banks should take on, along with the related policy implications for addressing climate change risks.

    Mr. Silva highlighted that reports from the insurance industry show a growing level of insured and uninsured losses resulting from climate-related risks. These losses impact the financial health of the insurer and the equity value of firms that are subject to these weather-related events. According to him, climate change can impact financial stability through three types of risks: physical risks, transition risks, and liability risks. He added that risks and returns of financial assets can become new key determinants of how effectively climate change can be combated. If investors assess and price financial risks properly, then polluting assets will become more costly. In turn, more investments will flow into green assets, driving the transition to a low-carbon economy. Research conducted at the BIS is looking into the potential mispricing of climate change-related risks. The research also examines if climate change risks, especially those related to climate policy risks, are priced into the bank syndicated loan market by combining syndicated loan data with environmental exposure data. It shows that insurance companies are reassessing their cost of insuring physical risk; rating agencies are repricing climate-related risks and reassessing the quality of credits; asset managers are becoming increasingly selective and inclined to start picking "green assets" for their portfolios; and pension funds are beginning to reassess their exposure to climate-related risks and "brown assets."

    According to him, the central banks need to be concerned about climate-related risks because of their financial stability implications. Central banks should clearly identify and quantify the risks to the common pool resource, that is, financial stability and find actions that reduce climate-related risks at the global level and also at a decentralized (local) level. They should monitor these arrangements and design and enforce rules for system stability, which implies coordination, local participation, and a sense of fairness in burden-sharing, incentives, and penalties. He added that, although the market for "greener" financial investment instruments has boomed, more progress in the taxonomy of what is "green" is necessary to avoid "green-washing" and excessive free-riding on the green label.

    Assessing the costs and benefits of more regulatory, direct interventions is also important. In addition to progress on disclosure of climate-related risks, some regulators and supervisors are also exploring the pros and cons of more interventionist approaches—namely, "green" relending facilities using adequate collateral, a subsidized administrative credit policy favoring "green" projects, and even ad hoc macro-prudential measures. The obvious issue here is to assess whether this proactive approach could create other distortions that could hamper the greening of the financial system and delay some of the initiatives described above. He concluded that central banks and supervisors cannot take on these new climate change risk-related challenges alone; they will need support from other policies conducted by other actors.

     

    Related Link: Speech

     

    Keywords: International, Banking, Green Finance, Sustainable Finance, NGFS, Climate Change Risks, ESG

    Related Articles
    News

    BIS Report Notes Existing Gaps in Climate Risk Data at Central Banks

    A Consultative Group on Risk Management (CGRM) at the Bank for International Settlements (BIS) published a report that examines incorporation of climate risks into the international reserve management framework.

    July 29, 2022 WebPage Regulatory News
    News

    EBA Publishes Multiple Regulatory Updates for Regulated Entities

    The European Banking Authority (EBA) published the final guidelines on liquidity requirements exemption for investment firms, updated version of its 5.2 filing rules document for supervisory reporting, and Single Rulebook Question and Answer (Q&A) updates in July 2022.

    July 29, 2022 WebPage Regulatory News
    News

    APRA Consults on Prudential Standard for Operational Risk

    The Australian Prudential Regulation Authority (APRA) is seeking comments, until October 21, 2022, on the introduction of CPS 230, which is the new cross-industry prudential standard on operational risk management.

    July 28, 2022 WebPage Regulatory News
    News

    EC Amends Rule on Securitizations; ESRB Updates Reciprocation Measures

    The European Commission published a Delegated Regulation 2022/1301 on the information to be provided in accordance with the simple, transparent, and standardized (STS) notification requirements for on-balance-sheet synthetic securitizations.

    July 27, 2022 WebPage Regulatory News
    News

    APRA Announces Revisions to Capital Framework for Banks

    The Australian Prudential Regulation Authority (APRA) is announced revisions to the capital framework for authorized deposit-taking institutions to implement the "unquestionably strong" capital ratios and the Basel III reforms.

    July 26, 2022 WebPage Regulatory News
    News

    EBA Examines Remuneration Data and Use of Large Exposure Exemptions

    The European Banking Authority (EBA) published a report that examines the use of certain exemptions included in the large exposures regime under the Capital Requirements Regulation (CRR).

    July 22, 2022 WebPage Regulatory News
    News

    UK Authorities Publish Discussion Paper on Critical Third Parties

    The Bank of England (BoE), the Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA) published a joint discussion paper that sets out potential measures to oversee and strengthen the resilience of services provided by critical third parties to the financial sector in UK.

    July 22, 2022 WebPage Regulatory News
    News

    BoE Issues Update on Ongoing Data Transformation Program

    The Bank of England (BoE) issued a communication to firms to provide an update on the progress of the joint data transformation program—which is being led by BoE, the Financial Conduct Authority (FCA), and the industry—for the financial sector in UK.

    July 21, 2022 WebPage Regulatory News
    News

    EBA Issues Draft Methodology and Templates for 2023 Stress Tests

    The European Banking Authority (EBA) published the draft methodology, templates, and template guidance for the European Union-wide stress test in 2023.

    July 21, 2022 WebPage Regulatory News
    News

    EBA Issues SREP Guidelines and Standards for Investment Firms

    The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) jointly published the final guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) for investment firms.

    July 21, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8407