Macroprudential policies for addressing climate-related financial risks: challenges and trade-offs

Highlights

• Macroprudential policies aim to maintain financial stability by increasing the resilience of the financial system (together with the microprudental framework) and containing the accumulation of systemic risks.
• Standard macroprudential instruments (such as capital add-ons on specific exposures) may not always contribute to these objectives when deployed to address the systemic implications of climate-related financial risks, as they could exacerbate transition risks.
• In order to mitigate these potential side effects, authorities need to carefully define the scope of application of such macroprudential policies.
• While overcoming these challenges is an operationally complex task, failure to do so may render such macroprudential policies ineffective and potentially counterproductive for financial stability.