Financial Supervision Beyond the Business Cycle

March 3, 2021Published by 2° Investing Initiative and the Oxford Sustainable Finance Programme

This paper from the 2° Investing Initiative and the Oxford Sustainable Finance Programme explores the extent to which long-term risks (LTR) are on the radar of central banks and financial supervisors.

The paper begins with an overview of LTRs and a discussion of their impact on the financial system before examining the evidence on LTR management at eight central banks, including the Federal Reserve, the European Central Bank, the Bank of England, and the People’s Bank of China.

Although climate change is an important LTR, the study also focuses on geopolitical, societal, technological and other risks. References to these risks in the public documentation of the eight central banks are examined and categorised into measuring, monitoring and mitigation activities.

It finds that LTRs are more often mentioned in speeches than in research, and that the most monitored risks are the ones that have recently happened, such as Covid-19. Monitoring of LTRs is mostly backward-looking instead of forward and most climate stress tests do not extend beyond the business cycle. Although mitigation is the most important step of risk management, central banks – especially from the global north – do not have mitigation policies for LTRs.

In a powerful call for corporate, financial and economic resilience, the paper then steps back to discuss the change in thinking required to address the gaps identified in the study and uncover the mechanisms to drive financial supervision beyond the business cycle to a longer time horizon.

It argues that a more resilient financial system needs to be built and that resilience can be strengthened by implementing precautionary measures. This can be done by supporting effective policy coordination and by moving away from efficiency and towards deliberately creating over-capacity.

This page was last updated April 27, 2021

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