Basel Committee issues clarifications on climate-related financial risks

January 16, 2023|Written by Todd Phillips|Basel Committee on Banking Supervision

The Basel Committee for Banking Supervision (BCBS) has explained in more detail how climate risks may be captured in the existing Basel framework. The clarifications, published in December, were released to facilitate consistent interpretation of existing Pillar 1, or capital adequacy, standards. The BCBS noted that the clarifications are not a change in standards, as climate-related risks fall into the traditional risk categories covered by the Basel framework.

The clarifications explain that banks should include climate risk in credit and market risk assessments, monitor climate risks on an ongoing basis, and use a conservative approach to assessing climate risks. They also instruct national regulators to consider jurisdiction-specific factors in several areas. Data limitations are explicitly acknowledged and institutions are encouraged to improve their capacity to assess risks when more data becomes available.

The clarifications are “intended to facilitate a globally consistent interpretation of existing standards given the unique features of climate-related financial risks”, and are consistent with the committee’s principles for climate-related financial risks issued in June 2022.

The principles were the first effort by the BCBS to provide guidance for managing and supervising climate-related financial risks. The first 12 principles cover banks’ corporate governance, internal controls, risk assessment, management and reporting, capital and liquidity adequacy. Other elements of risk management are also covered, including scenario analysis. The remaining six principles focus on financial supervisors and regulators activities.

The clarifications are the latest effort by the BCBS to address climate-related financial risks within the global banking system. The BCBS believes these risks can largely be addressed within the Basel Framework, but it is identifying potential gaps in the current framework and considering possible measures to address them.

The BCBS’s efforts have revealed divergent views within the finance sector over how regulators should address climate-related risks. The Climate Safe Lending Network recommends that the committee promote the use of climate-adjusted capital requirements and even require banks to fund fossil fuel projects solely with shareholder capital by imposing a 1250% risk weight or one-for-one rule). However, the American Bankers Association argues that any climate-related capital requirements would be premature and counterproductive at this point.

This page was last updated January 16, 2023

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