The Bank of International Settlements (BIS) has launched its findings on climate risk and banking, ahead of a potential revision of global rules governing the prudential regulation of banks.
BIS’s influential Basel Committee on Banking Supervision (BCBS), which represents central banks and supervisors from 28 jurisdictions, presented tandem reports concluding that banks may face reputational damage and litigation as a result of lending that negatively impacts on the climate, but such risks are not yet widely understood by regulators.
Analysis of climate-related financial risks currently focuses on how contractions in the economy will impact credit risks – or the ability of borrowers to repay debt – but does not sufficiently address other dimensions of risk which include liquidity, operational and reputational risks, the report found. This is partly due to the inherent complexity of estimating the nature of future climate hazards and changing societal values, it explained, in addition to data gaps at institutional level, such as information on the credit risks of individual borrowers, which are needed to quantify these risks.
These findings will be used as a “conceptual framework” to inform updates to BIS’s standards, known as the Basel Framework, which set out expectations for regulators around the world on bank capital adequacy, stress testing, liquidity risks and other mechanisms for ensuring economic resilience. The BCBS will now investigate the extent to which climate-related financial risks are addressed within the current framework and consider possible measures to address any gaps. It did not provide a timeline for this exercise.
While the BCBS stopped short of making specific policy recommendations, it suggested that regulators should improve the public collection of financial and non-financial data, and ensure that the information is relevant to risk management and sufficiently granular.
The Committee also acknowledged the need for new supervisory tools to assess longer dated climate risks, simply adapting existing tools which are designed for shorter horizons “may contribute to a mismeasurement of risk and – ultimately – impact effective and efficient risk intermediation”, it said.