BoE considering climate capital rules

October 28, 2021|Written by David Clarke|Bank of England, European Central Bank

The Bank of England (BoE) is considering changes to its capital framework to ensure that banks and insurers are sufficiently resilient to climate risks, according to a new report. It follows the revelation last week that the European Central Bank (ECB) is contemplating similar measures.

Although climate risks are covered to some extent by the existing framework, there are likely to be gaps relating to the uncertainty surrounding the scale and timing of climate impacts, and the short time horizon of most capital requirements, today’s BoE report finds.

The bank says it will carry out further research, work with international partners, and host a conference to discuss the matter, with the aim of providing more guidance by the end of 2022. It is considering a variety of options including both recalibrating existing prudential and macroprudential tools, and developing new ones.

In a speech in June, governor Andrew Bailey said the case for imposing higher capital requirements for carbon-intensive exposures had yet to be clearly established. This seemed to reflect the mood of central banks more broadly – a recent survey of NGFS members showed they wanted additional data and analysis before adjusting their frameworks.

The BoE and ECB’s apparent change of course in recognising the potential benefits of climate capital requirements will add to the already-growing pressure on their counterparts, including in the US, to follow suit. Last week’s Financial Stability Oversight Council report on climate risk was criticised by climate advocates for failing to give any consideration to tougher rules.

David Barmes, senior economist at Positive Money, stressed the need for swift action by the BoE.

“Higher capital charges for unsustainable investments would help secure financial stability and stem the vast amounts of money being poured into a carbon bubble,” he said. “Considering the huge work that needs to be done to align finance with governments’ climate commitments in such a narrow timeframe, such reforms are long overdue and policymakers should move to implement them without delay.”

This page was last updated October 28, 2021

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