A Nobel laureate says supervisors must understand climate uncertainty, systemic risk buffers and climate risk, an FSB call for transparency, cooperation and a holistic perspective, and more from this week in green central banking.
Central banking challenges posed by climate uncertainty
Commonly used “risk-based” methods of quantifying uncertainty in climate change miss important information, Nobel laureate Lars Peter Hansen has told a Bank of International Settlements (BIS) colloquium.
In a detailed keynote speech titled Central Banking Challenges Posed by Uncertain Climate Change, Professor Hansen said the long time horizon over which climate uncertainty occurs introduces subjective uncertainty and limits the accuracy of models used by both the regulated and regulators.
Understanding these limits would make oversight more effective, Hansen concluded, adding that “sometimes more can be accomplished by trying to do less”.
Hansen is a professor of economics at the University of Chicago and a 2013 recipient of the Nobel Memorial Prize in Economics. His research focuses on methods for pricing the exposure to macroeconomic shocks over alternative investment horizons and the pricing implications of long-term uncertainty.
The colloquium was held in honour of Jens Weidmann who stepped down as chair of the BIS board of directors in December 2021, and detailed slides of Hansen’s speech are available on the BIS website.
Climate impacts on society and economy ‘deeply uncertain’
Loïc Berger, professor of economics at IÉSEG School of Management, highlights research on incorporating climate-related uncertainty into analytical models in this week’s E-axes Forum digest.
Berger says that scientific and socio-economic uncertainty, along with a lack of normative knowledge in setting future discount rates, makes the impact of climate change on social and economic systems “deeply uncertain”. He also calls for methods that quantify the pertinent uncertainty as well as a framework to assess alternative courses of action.
Berger then briefly reviews five key papers discussing decision-making under uncertainty in the context of climate policy.
Systemic risk buffers insufficient for climate risk
There are growing indications that the European Central Bank (ECB) is considering the use of systemic risk buffers as a macroprudential tool against climate-related threats to financial stability. In the latest Climate Risk Review, Louie Woodall examines these instruments and concludes they are not fit for purpose.
Systemic risk buffers (SyRB) are already used to address all kinds of risks, Woodall points out, yet ECB data shows SyRBs made up only 0.7 percentage points of banks’ overall capital requirements and guidance in 2021.
Imposing an SyRB on banks’ fossil fuel exposures could mean picking winners and losers, he adds, while quoting the ECB preference to see it as “a policy reaction to the build-up of structural system wide risks,” accompanied by procedural criteria.
Other problems identified by Woodall are that SyRBs are a patchwork solution to a global problem and that an SyRB rate above a 5% threshold in any portfolio would require authorisation by the European Commission.
Knot calls for transparency, cooperation and a holistic perspective
Klaas Knot, chair of the Financial Stability Board, has said that transparency, cooperation and a holistic perspective are three common threads in the solutions to financial stability threats from the Russian invasion of Ukraine, cryptoassets and climate change.
Delivering the keynote speech on Wednesday to the annual general meeting of the International Swaps and Derivatives Association, Knot summarised the FSB’s roadmap for addressing climate-related financial risks, warning that current shortcomings in data should not prevent movement on policy actions.
“It is better to act on incomplete data than strive for perfection and act too late,” said Knot. “By embracing a holistic approach based on transparency and cooperation, we can continue to shape a financial system fit for the future.”
Knot is also president of De Nederlandsche Bank and thus a member of the ECB’s governing council.
RBNZ supports climate-related disclosure proposals
The Reserve Bank of New Zealand (RBNZ), also known as Te Pūtea Matua, has strongly supported detailed proposals for climate-related disclosure standards issued by the External Reporting Board (XRB), New Zealand’s financial standards body.
The proposals are part of a mandatory climate-related disclosure reporting regime which received legislative approval last year. “The framework reads as accessible, logical and balanced,” an RBNZ spokesperson said in a statement. “It is also world leading in terms of moving our financial system participants to a mandatory climate-related disclosure regime.”
The comments come as the RBNZ published its submission to the public consultation held by the XRB on the new disclosure requirements. New Zealand was the first country to announce mandatory TCFD-aligned climate-related financial disclosures in September 2020, and was quickly followed by Switzerland, the UK, China and other countries.
This page was last updated May 13, 2022
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