The regulatory response to climate risks: some challenges

Highlights

• There is a need for authorities to review their prudential frameworks with a view to taking full account of the implications of climate-related financial risks for financial stability.
• Given the longer time horizons and the higher degree of uncertainty associated with the materialisation of climate-related financial risks, standard Pillar 1 instruments might be suboptimal in addressing such risks.
• In contrast, the intrinsic flexibility of the Pillar 2 framework makes it the natural candidate for ensuring that banks effectively manage such risks and have sufficient loss-absorbing capacity against them.
• Applying the current macroprudential framework to contain systemic climate-related financial risks is likely to be ineffective and potentially counterproductive for financial stability. The same could be said of the introduction of a green supporting factor.

The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS, its member central banks or the Basel-based standard-setting bodies.