Weekly roundup: capital requirements vs supervision and Indonesia’s green agenda

February 25, 2022|Written by Graham Caswell|Central Reserve Bank of Peru, Bank of International Settlements, National Bank of Romania

Basel capital requirements versus supervision, Bank Indonesia’s green agenda, a new BIS green bond fund for Asia, the climate cost of bitcoin and more from this week in green central banking.

Basel capital requirements needed for climate risk

As the Basel Committee on Banking Supervision (BCBS) examines submissions to its recent public consultation on managing climate-related risks to global financial stability, analysts have pushed back against a recent paper suggesting that the Pillar 2 supervisory framework makes it sufficient for mitigating these threats.

The paper, published by the Financial Stability Instuitute, argues that Pillar 1 capital requirements “might be suboptimal” in addressing such risks because of the longer time horizons and greater uncertainty involved. Instead, it suggests that the “intrinsic flexibility” of the Pillar 2 supervisory framework makes it the “natural candidate” for addressing the climate threat to global banking and stability.

However civil society groups focusing on climate change contest this. Submissions to the BCBS consultation from the Climate Safe Lending Network and other organisations have called for strong climate-related Pillar 1 requirements, including a ‘one-for-one’ 1,250% risk weighting that would require banks to fund new fossil fuel projects from their own resources.

Climate risk analyst Louie Woodall offers another perspective in favour of capital requirements. “Pillar 2 measures are generally used to address banks’ risk management deficiencies, rather than unpriced risks that lurk in banks portfolios,” Woodall writes in Climate Risk Review. “This makes Pillar 2 of limited use when it comes to the big picture of facing down climate risks to the banking system.”

Woodall adds that, while Pillar 2 measures do not require a contentious rewriting of the Basel framework, this convenience cannot contend with the much broader scope that Pillar 1 affords supervisors to combat climate risks. Meanwhile, bank-by-bank Pillar 2 add-ons can not protect against systemic climate risk.

“Only Pillar 1 requirements, applied universally, have a chance to achieve this,” she says.

Bank Indonesia governor outlines green agenda

The governor of Bank Indonesia (BI) has outlined how a sustainable economy and green financial products will become part of the central bank’s policy mix.

Speaking at a side event of last week’s meeting of G20 finance ministers and central bank governors in Jakarta, Perry Warziyo said that green money market products, green finance for small and medium-sized enterprises, and sustainable Islamic economics and finance are key parts of BI’s efforts to become a “green central bank.”

Reviewing strategies to develop and increase sustainable finance instruments, Warziyo said that BI would “develop a green ecosystem in Indonesia through policies and support for green money market instruments”. However relevant authorities must provide supporting measures, he said, including a green taxonomy, and green verification and rating services.

Peru central bank president criticises bitcoin emissions

The president of the Central Reserve Bank of Peru has issued a strongly worded attack on bitcoin, focusing on the carbon emissions associated with mining the cryptocurrency.

“The problem with cryptocurrency now is climate change,” Julio Velarde said, adding that bitcoin is the least friendly cryptocurrency for the environment. “Continuing to mine bitcoins consumes the energy of a medium-sized country,” he said. “These are impressive amounts.”

The process of creating bitcoin consumes over 91 terawatt hours of electricity annually, more than is used by Finland and many other countries. Bitcoin mining now consumes 0.5% of all the electricity consumed in the world. Velarde announced in November that the central bank was working on its own digital currency focusing on payments.

BIS launches Asia-focused green bond fund

The Bank of International Settlements (BIS) has launched a green bond fund focused on Asia as part of its efforts to help channel central bank reserves to green projects in the region.

Collaboration with development finance institutions is a key feature of the new fund, said Siddharth Tiwari, chief BIS representative in Asia. “The BIS can play a role as catalyst in bringing the central banking and development communities together in support of our global effort. Asia is the right place to start this collaboration.”

The new fund offers central banks the opportunity to invest in green bonds issued by sovereigns, international financial institutions and corporates. Eligible bonds must have a minimum average rating of A- and comply with the International Capital Market Association’s green bond principles or the Climate Bonds Initiative’s climate bond standards. This is the third green bond fund issued by the BIS since 2019.

Romania’s stability report focuses on climate

The National Bank of Romania’s latest financial stability report has focused extensively on climate-related threats and opportunities, and includes a special feature on green lending across the Romanian banking sector.

Green loans make up only 4% of bank portfolios in Romania, the report says, far below the EU average of around 8%. Recent developments in fossil gas prices and “the looming energy crisis” offers potential for investment in energy efficiency and renewable energy production and storage, the report finds.

Supporting this finance will involve increasing the degree of transparency in non-financial reporting, it says, along with creating specific products and tailoring the regulatory framework.

This page was last updated February 25, 2022

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