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Carney, ACPR, DNB, host Climate Risk Conference for Supervisors

written by Joel Kenrick

Financial regulators from over 30 countries took part in a high-level International Climate Risk Conference for Supervisors on Friday 6 April 2018. The conference in Amsterdam was organised by De Nederlandsche Bank, ACPR, and Bank of England as part of the Central Banks and Supervisors Network for Greening the Financial System (NGFS). The Financial Times, Guardian, Reuters, Responsible Investor & Business Green covered the meeting and the speeches by Bank of England governor Mark Carney and Banque de France governor Francois Villeroy de Galhau.

'Central bank governors from the UK, France and the Netherlands are considering increasing regulatory oversight to address climate-related risks to the financial system, including carbon stress tests for banks' according to the Financial Times.

'François Villeroy de Galhau, head of the French central bank, ... lobbied for compulsory disclosure of EU banks’ and insurers’climate-related risks, penalties for investing in assets linked to high emissions, as well as carbon stress tests for all financial institutions — a measure that would be unprecedented for the banking sector. ... Mr Villeroy de Galhau said a carbon stress test for financial institutions could assess “the probability of default over a much longer horizon than the usual one of one year”. He also said climate-related disclosures could “gradually evolve” to become compulsory, along with a “comply or explain” option that would allow companies to issue an explanation if they decided not to disclose.' (FT)

Mark Carney 'has warned of the “catastrophic impact” climate change could have for the financial system unless firms do more to disclose their vulnerabilities,' report The Guardian ... 'He said the financial industry could be forced into making rapid adjustments if could be forced into making rapid adjustments if they did not gradually expose where their climate change risks might lie, which he said could trigger steep loses. The governor warned of a 'climate Minsky moment', referring to the work of the economist Hyman Minsky, whose analysis was used to show how banks overreached themselves before the 2008 financial crisis.'

Carney also said 'the Task Force on Climate Related Financial Disclosure (TCFD) will continue beyond the Argentine G20 Summit in late 2018 and into the Japanese G20 presidency in 2019' according to Responsible Investor.

Ahead of the meeting the Council for Economic Policy published a discussion paper 'Central Banks and the Transition to a Low-Carbon Economy', arguing central banks should evaluate climate-related systemic risks in the financial sector, implementing higher capital requirements for loans to carbon-intensive economic activities and recognise that current large-scale asset purchases by central banks are biased toward incumbent carbon-intensive sectors, and ensure that climate-related risks are reflected in their own balance sheets and collateral frameworks (22 Mar).

If you want to dive deeper, below a few other pointers from the governors' speeches.

Banque de French governor Francois Villeroy de Galhau in his speech argued that we should:

  • ‘Move gradually towards a compulsory transparency requirement in Europe’ on the 'disclosure of existing exposures in the financial sector' to climate change. (p.3)
  • ‘Develop forward-looking carbon stress tests for both insurance companies and banks’ - what he calls “the video of risks”. This would require additional work to translate climate change scenarios into economic scenarios and require assessing the impact of shocks on the probability of bank / insurance company default over a longer time horizon that the usual one year. (p.3)
  • ‘Target brown assets with a “brown penalising factor”, because the transition risks will at some point materialise. This could be designed either as a dedicated Systemic Risk Buffer or be integrated into Pillar 2 requirements.’ Note: this is in opposition to EU Commissioner Dombrovski who has supported a ‘green supporting factor’ (lowering risk requirements for green, as urged by some) as opposed to a ‘brown penalising factor’ which could make it harder for coal and high-carbon assets to receive financing. (p.4)
  • The Banque de France has committed to improve the contribution of their own funds and pensions portfolios to the environmental transition, and will report annually on progress. (p.5, see also RI: French central bank introduces RI strategy for €20bn of its own pension and treasury funds)
  • He said that the French supervisor ACPR estimates that '13% of French banks’ total net credit exposure is to sectors vulnerable to transition risks’ from climate change. (p.2)

Bank of England Governor Mark Carney said (full speech, pdf):

  • There has been 'a transition in thinking' among financial institutions on climate risk, with financial institutions managing US$80 trillion of assets publicly supporting the Task Force on Climate-related Financial Disclosures (TCFD), including '20 globally-systemic banks, 8 of the top 10 global asset managers, the world’s leading pension funds and insurers, the largest sovereign wealth fund and the two dominant shareholder advisory service companies.’
  • 'A transition into action’ is beginning, by governments, on climate disclosures, by insurers and banks and by financial policymakers. This includes:
  • The TCFD will deliver two initiatives to support climate disclosures a) a report on implementation experience in time for the Argentine G20 Summit, and b) a Resource Hub to provide technical support, data and collaborative partnerships so companies can implement the TCFD recommendations.
  • ‘There is likely cause for the Task Force to continue beyond the Argentine Summit in late 2018 and into the Japanese presidency.’
  • An upcoming Bank of England staff note will find that intense hurricanes ‘seem to be getting more frequent and the chance of two or more occurring close together may be higher than previously thought.’
  • A majority of banks now see climate risks as a financial risk, with oversight elevated to Board level, according to a survey by the PRA (UK Prudential Regulatory Authority)
  • The Bank of England will publish the full results of a survey of the financial risks faced by the UK banking system from climate change 'in coming months’. They will consider whether insurers and banks have adequate governance arrangements on climate risk and aim to ‘articulate our (BoE) supervisory expectations later this year.’
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