Central banks could use capital buffers to protect against climate risks

Key points:

• The NGFS suggests central banks impose capital buffers on high-emitting loans and vulnerable mortgage portfolios.

• Updated guidance recommends using adjusted loan-to-value limits and green lending terms to manage systemic risk.

• Central banks are urged to address climate risks within existing statutory frameworks, whether explicitly or implicitly.

• The NGFS is broadening its risk indicators beyond carbon to model ecosystem dependencies and biodiversity loss.

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Central banks could require banks exposed to climate-vulnerable regions or sectors to hold extra  capital under new guidance.

This recommendation is part of an updated guide for supervisory authorities, released by the membership group for central banks, the Network for Greening the Financial System (NGFS).

The guide presents best practices for embedding climate and nature-related risks into financial supervision, while stressing that implementation should reflect central banks’ different mandates, legal frameworks and national circumstances, with measures applied proportionately.

Alberto Casillas, NGFS’s workstream supervision co-chair and senior advisor at Banco de España, emphasised during a webinar held alongside New York Climate Week, that the guide should be seen as a “supervisory roadmap” rather than a “uniform implementation template”.

Under the proposals, central banks could apply a capital buffer when banks’ lending to high-emitting sectors exceeds a specified threshold. The NGFS says this could help preserve financial stability if an abrupt policy shift or rapid repricing of carbon-intensive assets generates simultaneous losses across multiple financial institutions.

The NGFS also suggests that banks with large mortgage portfolios in areas vulnerable to, for instance, recurrent flooding could be subject to higher capital requirements  as a preventative measure against severe climate events.

Climate systemic risk buffers have previously been encouraged by non-profits, which argue  that they could reduce the risk posed  by banks’ exposure to fossil fuels.

Banks worldwide already have to maintain several capital buffers, depending on their jurisdiction, to absorb potential losses during periods of financial stress. But no blanket buffer to address climate change has so far been implemented. Applying a climate buffer could strengthen the banking system against both transition and physical climate risk, the NGFS says.

Other macro-prudential tools

Compared to the NGFS’s previous supervisory guide, published in 2020, this edition carries a greater focus on practical implementation, adaptation and forward-looking measures to build resilience. 

The updated guide also examines financial instruments to incentivise green lending. These include  adjusting borrowing conditions according to predefined environmental characteristics.

Supervisors could consider adjusting loan-to-value limits or down-payment requirements for certain green assets as part of a broader policy package that supports purchases, such as energy-efficiency improvements or low-emission vehicles. Such measures could be combined with fiscal incentives, simpler administrative processes and public outreach.

As part of their supervisory remit, the NGFS also warns that central banks should actively monitor the insurance protection gap given the potential implications for financial stability. Where households and businesses lack adequate insurance, they bear a larger share of losses from climate-related events, which can affect the asset quality of banks’ balance sheets.

Greater scrutiny of the insurance protection gap combined with enhanced macro-prudential climate scenario analysis could provide early detection of systemic risks arising from physical climate hazards, argues the NGFS.

Climate governance

Another aspect of the guide considers how central banks can incorporate climate and nature-related risks into their day-to-day operations.

A survey conducted in early 2026, representing 70% of the NGFS membership, found that climate governance at central banks is approached in different ways. These include integrating climate and nature-related risks into strategic plans, establishing dedicated board-level or executive committees and designating senior officials responsible for climate-related supervisory work.

Regardless of the structure adopted, the NGFS urges each jurisdiction to gradually establish a data governance and sharing framework to support climate and nature-related risk assessments, based on national circumstances.

Given the influence of climate change on macroeconomic variables, central banks and supervisors may consider monitoring climate-related risks part of  their existing mandates even where climate change is not explicitly mentioned, the NGFS says.

Through its survey, the NGFS found that in Africa, Asia-Pacific and the Americas, climate-related risks are often addressed indirectly through broader objectives such as price and financial stability.

By contrast, in Europe, climate-related responsibilities are more frequently referenced explicitly within supervisory mandates and prudential legislation.

“The NGFS does not take a position on whether climate and nature-related risks should be reflected explicitly or implicitly, nor does it suggest that one approach is preferable to the other. Rather, the NGFS encourages supervisors to consider how climate and nature-related risks are, or could be, captured within their existing mandates, given the potential implications of these risks for the financial system,” the guide states.

In January 2025, the Federal Reserve Board withdrew its membership from the NGFS citing that the organisation now covered a wider range of issues “outside of the board’s statutory mandate”.

Key risk indicators

With physical risks and transition risks underpinning climate change and the green transition, the NGFS guide explains how these risks translate into financial risks, including credit, market, liquidity, operational, underwriting and litigation.

As an example, projects intended to advance the transition may entail significant ecological trade-offs or procedural deficiencies, giving rise to legal challenges, the NGFS notes.

Based on 2025 data disclosed by financial institutions through the CDP platform, the NGFS found that major physical hazards can affect several financial risk categories, rather than a single type.

Flooding was most frequently linked to credit risks, reflecting collateral values and borrowers’ ability to repay. Heat was more commonly associated with insurance risks, including impacts on mortality, sickness and productivity. Drought and water stress were predominantly framed through credit and operational risks. 

Market and liquidity risks appeared less frequently but are present across most physical hazards, pointing to potential second-round effects, according to the NGFS.

To better monitor physical risks, central banks have begun using key risk indicators, such as vulnerability to climate hazards, geographical location of assets and the interconnectedness of physical risks among financial institutions.

The NGFS lists financed emissions and the carbon intensity of banks’ portfolios as key indicators in supervising transition risk. 

A smaller number of central banks have started defining risk indicators for nature-related risks,  including banks’exposure to water scarcity and their financing of activities dependent on ecosystems and natural resources.

With roughly only 40% of surveyed members currently considering nature-related risks, the NGFS is set to launch a call for nature scientists to help develop its modelling ofl nature-related financial risks.

Olaf Sleijpen, chair of the NGFS and president of the Dutch central bank, said in a video accompanying the launch of the new guide, that work will continue with NGFS members to improve the supervision of climate and nature-related risks.

“The guide is a big step forward, but not an end point,” he said.

 

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