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

    HKMA Reduces Countercyclical Capital Buffer in Hong Kong to 2.0%

    HKMA announced that the countercyclical capital buffer (CCyB) for banks in Hong Kong has been reduced from 2.5% to 2.0%, with immediate effect, in accordance with the Banking (Capital) Rules.

    October 14, 2019 WebPage Regulatory News
    News

    EBA Single Rulebook Q&A: Second Update for October 2019

    EBA updated the Single Rulebook question and answer (Q&A) tool with answers to ten questions.

    October 11, 2019 WebPage Regulatory News
    News

    EC Consults on Implementation of Final Basel III Reforms in EU

    EC launched a public consultation on the implementation of Basel III standards in EU.

    October 11, 2019 WebPage Regulatory News
    News

    OCC Revises Minimum Threshold for Banks to Conduct Stress Tests

    OCC issued the final rule that amends its company-run stress testing requirements under the 12 CFR 46 in Code of Federal Regulations.

    October 10, 2019 WebPage Regulatory News
    News

    US Agencies Update Management Interlock Rules Under DIMIA

    US Agencies (FDIC, FED, and OCC) issued a final rule that increases the thresholds in the major assets prohibition for management interlocks for purposes of the Depository Institution Management Interlocks Act (DIMIA).

    October 10, 2019 WebPage Regulatory News
    News

    US Agencies Finalize Rules to Closely Match Bank Risk Profiles

    US Agencies (OCC, FED, and FDIC) finalized rules that tailor the regulations for domestic and foreign banks to more closely match their risk profiles.

    October 10, 2019 WebPage Regulatory News
    News

    CPMI-IOSCO and FSB on Governance Arrangements for OTC Derivatives

    CPMI and IOSCO published a report that identifies key criteria, functions, and bodies for the governance arrangements.

    October 09, 2019 WebPage Regulatory News
    News

    EIOPA Launches Field Test on Templates Under 2020 Solvency II Review

    EIOPA, as part of the 2020 Solvency II reporting and disclosure review, launched a field test on the revised and newly proposed reporting templates.

    October 09, 2019 WebPage Regulatory News
    News

    US Agencies Adopt Rule on Appraisals for Real Estate Transactions

    US Agencies (FDIC, FED, and OCC) adopted the final rule to amend regulations requiring appraisals of real estate for certain transactions

    October 08, 2019 WebPage Regulatory News
    News

    US Agencies Finalize Amendments to Simplify Volcker Rule

    US Agencies (CFTC, FDIC, FED, OCC, and SEC) finalized amendments to the regulations implementing section 13 of the Bank Holding Company Act, also known as the Volcker Rule.

    October 08, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 3963