Tackling systemic climate risk is ‘appropriate’ for most banking supervisors, say Basel Committee group

Finding revealed in the Task Force on Climate-Related Financial Risk’s first report

Most of the Basel Committee’s central and reserve bank members consider it “appropriate” to address climate-related financial risks within their regulatory and supervisory frameworks, according to the first report to come out of the network’s systemic climate risk task force. 

The high-level Task Force on Climate-related Financial Risks (TFCR), co-chaired by Frank Elderson of the Dutch central bank and Kevin Stiroh of the Federal Reserve Bank of New York, was set up last year. It was tasked with contributing to the Basel Committee on Banking Supervision’s mandate of enhancing global financial stability through preparing a set of analytical reports on climate-related financial risks.

The task force members are employees of Basel Committee member organisations.

The first paper to come out of the initiative is a “stocktake” of climate risk initiatives being carried out by the Basel Committee’s member organisations  – central banks, reserve banks and other supervisors.

According to the findings, “a few” respondents thought climate risk should be embedded into existing risk categories “to the largest extent possible”, rather than being considered a new category of risk. 

Just one respondent had a specifically designated mandate with regards to ESG risks, which include climate risks.

37 of the Committee’s 45 member organisations responded to the questionnaire, in addition to three other organisations in other capacities. Respondents included the likes of the European Central Bank, the People’s Bank of China, the Bank of England, the Bank of Japan, the Bank of Russia and the Saudi Arabian Monetary Authority. 

Participating in stock-taking exercises is not mandatory for members, and those that did not take part were: the Reserve Bank of Australia (though the Australian Prudential Regulation Authority responded), the Bank of Canada (though the Office of the Superintendent of Financial Institutions responded), the Reserve Bank of India, South African Reserve Bank, the Luxembourg Surveillance Commission for the Financial Sector, Central Bank of the Republic of Turkey, Turkey’s Banking Regulation and Supervision Agency and the European Central Bank’ s Single Supervisory Mechanism. 

Additionally, not all respondents answered all the questions, so the total number of respondents varies for each question.

An “overwhelmingly” large share of the members have conducted research on measuring climate-related financial risk, although the report finds a number of members identified challenges in assessing climate-related financial risks such as data availability and methodological challenges.

Around two-fifths of members have issued, or are in process of issuing, more principles-based guidance regarding climate-related financial risks. However, the majority have no plans to factor the mitigation of such risks into the prudential capital framework.

The “stocktake” report had been scheduled for publication in March, but was delayed because of the Coronavirus crisis. 

The TFCR’s future work will include publishing reports on the “transmission channels” of climate risks to the banking system, measurement methodologies, and effective supervisory practices for climate risk mitigation. 

The Basel Committee, which is hosted in the Bank for International Settlements in Switzerland, describes its mandate as “strengthening the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability”, though it does not have any formal supranational authority and relies on the commitment of its membership to achieve its mandate.