The regulatory response to climate risks: some challenges
In February, the Financial Stability Institute (FSI) published a paper on the regulatory response to climate risks. From a technical standpoint, this paper examines the challenges authorities would face when trying to adapt the prudential framework to deal with climate-related financial risks, and it examines different policy options.
Below you can find the key takeaways:
- In order to have financial stability, authorities should revise their prudential frameworks to make sure that climate-related risks are fully considered.
- Due to the longer time horizons and a greater level of uncertainty associated with climate-related financial risks, standard Pillar 1 instruments may not be adequate to address these risks.
- By comparison, Pillar 2's inherent flexibility makes it an optimal framework for ensuring that banks can manage such risks effectively and have sufficient loss-absorbing capabilities against them.
- Current macroprudential frameworks are unlikely to manage systemic climate-related risks effectively and can even be counterproductive to financial stability. Green supporting factors would be similarly ineffective.
Published on 13.07.2022
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