The need to address climate-related financial risks has been reiterated by a senior member of the Basel Committee on Banking Supervision.
Neil Esho, secretary general of the committee, used a recent speech to highlight the importance of taking climate into consideration, saying weaknesses in financial regulation must be urgently addressed.
Esho’s speech at the 2023 Eurofi financial forum elaborated on the inclusion of climate-related financial risks in proposed amendments to the Basel Committee’s core principles for banking supervision.
The inclusion of climate-related financial risks, which are currently under consultation, is a first for the core principles. The proposed changes aim to reflect elements of the committee’s principles for the effective management and supervision of climate risks.
Esho said the Bank for International Standards, which houses the Basel Committee, expects banks to understand how climate-related risk drivers manifest via financial risks, to recognise that risks develop over varying time horizons, and to implement the necessary measures to mitigate such risks. Supervisors should also account for financial risks associated with climate change when overseeing banks and should be able to evaluate the risk management procedures employed by these banks.
Esho said strong capital and liquidity buffers can buy time for banks to address weaknesses but stressed that timely action is essential. He noted that the history of banking crises is characterised by a gradual buildup of vulnerabilities followed by a sudden realisation of losses, highlighting the critical role of effective supervision and a robust regulatory framework.
Reflecting on the turmoil caused by the collapse of Silicon Valley Bank and other banks earlier in the year, Esho used a quote from Ernest Hemingway to describe how weaknesses in the banking system emerge – “Two ways: gradually and then suddenly” – underscoring the urgency of addressing vulnerabilities in the financial sector.
The secretary general also explained underlined that the concept of proportionality underpinned the principles, reflecting the “idea that rules and supervisory practices are commensurate with banks’ systemic importance and risk profiles”.
The BIS released a document comparing the 2012 and 2023 versions of the core principles. The public consultation closes on 6 October, with the final revised standard expected to be published around summer next year.
This page was last updated September 15, 2023
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