BoE’s Ramsden: climate rules won’t prompt rush to shadow banks

October 6, 2021|Written by David Clarke|Bank of England, Federal Reserve

The Bank of England’s deputy governor Dave Ramsden has expressed optimism that tightening climate rules on banks will not lead to increased financial flows towards unregulated institutions. Speaking in a webinar on Monday, he said regulators are alert to the risks facing the non-bank finance sector and are focused on ensuring it plays a positive role in supporting the low-carbon transition.

The increased regulation of climate-related financial risks, such as through mandatory disclosure and climate stress tests, has prompted some concern over the incentives carbon-heavy borrowers may face to seek credit outside of the mainstream banking system.

The issue has led to calls for climate factors to be extended to the regulation of shadow banking lending and derivatives markets. A paper by SUERF earlier this year called for UK regulators to influence the cost to firms of raising finance via both banks and shadow banks based on the greenness and dirtiness of their activities.

A separate report, also published this year by the Center for American Progress, called on regulators to use prudential tools to limit banks’ ability to facilitate climate risks migrating to the shadow banking sector. The authors noted that the sector relies heavily on financial support from the mainstream banking system.

Ramsden made his comments following a conversation with former governor Mark Carney. He said he was “conditionally optimistic” on the potential pitfalls of tighter climate rules, adding that there is currently a huge focus within the supervisory and regulatory world on non-bank finance.

He said that lessons were being learned following the pressure the sector came under during the Covid crisis, which saw panicked investors engage in a “dash for cash” amid a sharp decline in revenues.

“It’s front of mind to make sure that this incredibly important area of finance is safe and can play its part in channeling finance to the key macroeconomic objectives – short, medium and long term – of which climate finance is absolutely central,” he said.

This page was last updated October 6, 2021

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