Recently, the Basel Committee on Banking Supervision issued a proposal to increase the capital banks hold against cryptoassets to 1250%. Following this development, James Vaccaro, Executive Director of the Climate Safe Lending Network (CSL), asked a crucial question: “Why not apply a 1250% rule to new fossil fuel expansion and exploration?”
The question is not without merit for two reasons. First, the International Energy Agency’s new scenario demands an immediate halt to such fossil fuel projects to keep global heating under 1.5ºC to avoid the worst effects of the climate crisis.
Secondly, CSL has recently asked finance experts and economists what would be the most impactful and effective financial policy to shift the sector’s lending behaviours. Among several proposals the winning answer was to adjust capital instruments.
CSL is a transatlantic multi-stakeholder network of banks, NGOs, academics, investors and others aiming to accelerate the decarbonisation of the banking sector. Therefore, Vaccaro’s proposal could find political traction, forcing the hands of central bank governors who postpone decisive action in the hope of receiving more comprehensive climate risk data, which they may never obtain due to the unpredictable nature of social and climate systems.
Vaccaro’s 1250% proposal – first put forward by Finance Watch – deserves further investigation, so Green Central Banking invited him to explain in more detail.
Why do you think fossil fuels and Bitcoin are being treated separately?
It is a matter of ‘political agreement’ first. The IEA’s Net-Zero 2050 scenario puts it clearly that investment in new fossil fuel supply beyond projects already committed as of 2021 is not compatible with 1.5ºC. This is the first step and has huge political sympathy, but in my view the question has not yet been put in the context of the huge risk it brings to the financial sector.
Moreover, cryptoassets are still relatively small, so the impact would not be huge in terms of how much additional capital banks would be required to hold. The same would be true for the lending to ‘additional’ expansion and extraction of fossil fuels. At the moment, it’s the banks’ choice if they want to do that. This first step will have no destabilising capital bill on banks.
What do you think about the overall idea of a ‘green’ Basel Accord, including the toolkit proposals and a 1250% risk weight for new fossil fuel exposures?
A green Basel Accord would mean a technical review of the whole ball game – complex to model and likely to move slowly. A 1250% risk weight can be an immediate step and become policy tomorrow if there is the will to do so.
Arguably, cryptoassets have been more volatile, whereas fossil fuels may take us over the edge of a cliff for the first and last time. If financial regulators really believe the customer health warning that past performance is not a reliable guide to future prospects, then they should start acting like they understand it.
What might the advantages be of applying such a risk weight at the Basel Accord level, as opposed to a national level?
Risk weight adjustment at the Basel level would be required to prevent geographic arbitrage, by which banks with the lowest common denominator regulation achieve temporary gains. A level playing field is the best way to move the banking sector strategy en masse.
Of course, it might also be necessary to carry the rules through to shadow banking and capital markets debt issuance.
Will the US Basel Committee members (such as the Fed) support a green Basel Accord?
I think the question for the US is whether the Treasury Department recognises the need to establish a precautionary principle, as per Sarah Bloom Raskin’s comments at Green Swan Conference. I sense that they see that argument clearly, and can then clarify the mandate for the Fed and other regulators accordingly.
Additionally, the concept needs to be better understood by the public. BIS did a good job of explaining that on crypto by saying, “If you do it, it’s at your own risk.” That is what 1250% means.
This page was last updated April 27, 2022
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