Weekly roundup: climate defaults and the ECB’s mandate

October 1, 2021|Written by Graham Caswell|Reserve Bank of Australia, Bank of International Settlements, Bank of Canada, European Central Bank, Federal Reserve

Residential mortgages pose a climate risk to US financial stability, Canadian and Australian regulators to expand disclosure expectations, a new FSB financial stability surveillance framework, and more from this week in green central banking.

US mortgage bankers warn of climate defaults

A recent report from the US Research Institute for Housing America (RIHA) warns of increasing mortgage defaults as a result of climate change, potentially leading to financial instability.

The report finds that the resulting losses, many of them uninsured, could force lenders to increase interest rates and thus compound the problem. The federal National Flood Insurance Program is a climate risk backstop to Fannie Mae and Freddie Mac, it warns, and its collapse could trigger significant instability. The report also shows that climate change will add stress to the complex system of allocating risks across stakeholders in housing and housing finance.

The RIHA is the research arm of the Mortgage Bankers Association, a trade group representing the real estate finance industry.

ECB must support low carbon transition

The European Central Bank (ECB) is obliged to support the transition to a low-carbon economy, argues an article published on Monday by the Official Monetary and Financial Institutions Forum, an independent think tank and network covering central banking, economic policy and public investment.

Authors Rens van Tilburg (Sustainable Finance Lab) and Professor Seraina Grünewald (Radboud University Nijmegen) say that the full year that the ECB will take to review its collateral valuation and risk control framework is “irresponsibly long”. They also state that the share of carbon-intensive firms in the ECB’s portfolio is twice as high as in the overall economy. .

Their conclusion is that “the ECB is working against the stated climate policies in the European Union” and therefore contravenes its secondary mandate outlined in article 127 of the Treaty on the Functioning of the EU. The authors say that this failure to act on climate change, despite a clear mandate to do so, is a threat to the ECB’s independence.”.

Canadian regulator to expand disclosure

The new head of Canada’s Office of the Superintendent of Financial Institutions has said climate disclosures and climate risk management for federally regulated financial institutions will “expand materially”.

Speaking at the 2021 Global Risk Institute Annual Summit on Wednesday, Peter Routledge acknowledged that current Canadian reporting of climate data “falls somewhat short” of making climate-related risks transparent and questioned whether the current framework was sufficient for a Canadian context. However, he offered no detail or timeline for new measures.

Australian regulator to set climate expectations

The Australian Council of Financial Regulators (CFR), the coordinating body for the county’s financial regulatory agencies, has said its members will set supervisory expectations on climate-related financial disclosures over the coming year.

The body will work to improve the “quality, consistency and breadth” of climate risk disclosures, and will issue further expectations on governance, strategy, risk management, scenario analysis and stress testing. It will also assess scenarios used in the current climate vulnerability assessment of major banks conducted by the Australian Prudential Regulation Authority, and examine how they might be more broadly used to inform disclosures.

The CFR climate change working group is also considering the introduction of mandatory climate-related financial disclosures aligned with the recommendations of the Taskforce on Climate-Related Financial Disclosures.

FSB launches financial stability surveillance framework

The Financial Stability Board (FSB) has launched a new financial stability surveillance framework intended to offer a “comprehensive, methodical and disciplined” review of vulnerabilities to help identify and address new and emerging risks to financial stability.

The framework does not address specific risks such as climate-related ones, but instead provides a framework for exploring and assessing all risks to global financial stability. It will be used to develop global financial stability assessments similar to the national assessments carried out by central banks and financial supervisors.

Formed in the aftermath of the 2008 financial crisis, the FSB is the international body that monitors and makes recommendations about the global financial system. Its board includes representatives from all G20 major economies and the European Commission, and is hosted and funded by the Bank for International Settlements.

This page was last updated October 1, 2021

Share this article