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

    EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA

    The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.

    May 11, 2022 WebPage Regulatory News
    News

    EC Mandates ESAs to Propose Amendments to SFDR Technical Standards

    The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.

    May 11, 2022 WebPage Regulatory News
    News

    EBA Examines Supervisory Practices, Issues Deposits Reporting Template

    The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),

    May 11, 2022 WebPage Regulatory News
    News

    US Agency Publications Address Basel, Reporting, and CECL Developments

    The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances

    May 09, 2022 WebPage Regulatory News
    News

    SEC Extends Comment Period on Climate Risk Disclosures

    The U.S. Securities and Exchange Commission (SEC) looks set to intensify focus on crypto-assets and cyber risk and extended the comment period on the proposed rules to enhance and standardize climate-related disclosures for investors.

    May 09, 2022 WebPage Regulatory News
    News

    APRA Reduces Committed Liquidity Facility, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility and issued an update on the operational preparedness for zero and negative market interest rates.

    May 09, 2022 WebPage Regulatory News
    News

    CMF Consults on Basel Rules, Presents Roadmap to Address Climate Risks

    The Commission for the Financial Market (CMF) in Chile published capital adequacy ratios (as of February 2022, January 2022, and December 2021) for 17 banks and for the banking system.

    May 06, 2022 WebPage Regulatory News
    News

    PRA Issues Statement on NPEs and Policy on Trading Activity Wind-Down

    The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures.

    May 06, 2022 WebPage Regulatory News
    News

    EBA Updates Standards for 2023 Benchmarking of Internal Approaches

    The European Banking Authority (EBA) updated the implementing technical standards that specify the data collection for the 2023 supervisory benchmarking exercise in relation to the internal approaches used in market risk, credit risk, and IFRS 9 accounting.

    May 06, 2022 WebPage Regulatory News
    News

    EIOPA Responds to Stakeholder Views on Blockchain in Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published a feedback statement on the responses received to the consultation on blockchain and smart contracts in insurance.

    May 06, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8179