BoE puts climate capital plans on hold

The Bank of England (BoE) last year said that it aimed to release new guidance on potential changes to its regulatory capital framework to address the mounting financial risks posed by climate change. However, a spokesperson has told Green Central Banking that the plans are now on hold.

The BoE held a conference on climate and capital in October and a report on the event is expected in the coming weeks, but the bank will make no substantive policy announcements in the near future. This is despite having previously signalled that new guidance would be published by the end of 2022.

“I think it’s an issue we’re approaching methodically, and with international partners. So that means [further announcements] won’t be imminent,” the spokesperson said.

BoE failing to safeguard financial stability, says thinktank

Responding to the news, Lukasz Krebel, an economist at the New Economics Foundation, praised the bank for exploring the significance of climate risks for capital requirements and for organising last year’s conference. However, he suggested it is wrong to delay the implementation of any concrete measures.

“It was great to see the Bank of England and the Prudential Regulation Authority providing space for debates on how regulators can get to grips with climate risks in the capital framework,” he said. “But conversation can only go so far and it’s disappointing to hear they aren’t likely to increase capital requirements on the most risky investments with the necessary urgency.”

The BoE itself has acknowledged that climate risks may not be fully captured by the current capital regime, for example due to shortcomings in existing methodologies and because they will take longer than other risks to fully crystallise. The bank has also repeatedly warned that the switch to clean energy could cause high-carbon investments to rapidly lose value.

Krebel said that the BoE is therefore “failing to safeguard UK financial stability from a disorderly transition and worsening climate crisis”.

Focus turns to international negotiations

Instead of revising its capital standards unilaterally, the UK may focus on negotiating an agreement at the international level. The Basel Committee on Banking Supervision (BCBS) recently released a clarification on how climate risks may be captured in the existing Basel framework, and said that climate risks can largely be covered by existing Pillar 1 standards.

But the BCBS has also acknowledged the existence of potential gaps within the current regulatory framework, and says it is working to identify those gaps and develop measures to address them. It cites this as a strategic priority for the organisation in the coming year.

The BCBS is the primary global standard setter for the prudential regulation of banks. It reports to a group of central bank governors and supervisory chiefs, from whom it seeks endorsement for major decisions. The BCBS’s work on climate and capital is likely to be a focus of the committee’s annual meeting in June 2023.

Push for one-for-one rule goes global

Civil society groups and economists say the only way to prevent banks needing huge taxpayer bailouts from climate-related losses is to implement higher capital requirements against lending towards the instigation and expansion of fossil fuel projects.

The one-for-one rule would require financial institutions to hold the same amount in capital against every pound of financing for new fossil fuels.

A recent bid to introduce the measure via an amendment to EU legislation was unsuccessful, and the UK government has so far dismissed calls to implement it as part of the financial services bill currently passing through parliament. Advocates for the proposal are already focused on the BCBS-level negotiations, although they stress that action by individual countries could set an important precedent.

“It’s a shame to see the UK stalling when it should be playing a leading role internationally, especially given [the BoE’s] remit to support the net-zero transition,” said David Barmes, head of research at Positive Money UK.

Barmes dismissed the idea that substantial additional work is needed before introducing tougher rules on high-carbon finance.

“As proposals like the one-for-one rule gain traction, policymakers can no longer feign ignorance of the solutions laid before them,” he argued.