Programme: Central banking and financial supervision in the biosphere

Environment-related financial risks and regulatory capital requirements

The project focuses on green central bank policies, with a focus on green credit policy and regulatory capital frameworks. We shed light on the adoption of green policies by central banks as a means to mitigate the adverse effects of climate change. Our project develops general equilibrium models with incomplete markets, liquidity, collateral constraints and default that can be used for ex-ante evaluation of green climate policy and capture multiple channels of interaction. Our emphasis is on income and wealth inequality consequences of central bank green regulatory and monetary policy, and the importance of the rate of taxation to supplement the role of central banks.

“Nature, Finance and the Macroeconomy: Risks, Impacts and Feedback effects”

The Asia School of Business, Bank Negara Malaysia, CEP, sustainable macro and INSPIRE invite you to this conference, taking place in person in Kuala Lumpur, Malaysia, on 19-20 October 2023. The conference addresses challenges posed by nature loss, including deforestation and land-use change, and the related environmental risks and impacts for the macroeconomy and finance. It aims to also discuss implications for monetary policy, financial supervision and climate policy.

Registration:

Please click on this link to register for the conference as an on-site or online attendee.

A full agenda will be made available below in early September, when the final list of presenters will be published. A PDF version of the invitation is available for download here. Please share it with your networks!

Climate, Lives, Inequalities, and Financial Frictions

Climate change is expected to have increasing impacts on our economies and societies. The extent of such economic impacts has generally been analyzed with integrated assessment models. These models have substantially improved over time to account for various features that may lead them to underestimate the extent of climate damages. There is, however, in our view, one crucial feature that so far has not yet been accounted for: financial frictions. We consider that financial frictions may amplify the impact of climate damages on the affected economies, to an extent that has not yet been measured. Hence, the main goal of this project is to extend integrated assessment models of climate change to include financial frictions, to measure the possibility that physical risks, the impact on financial assets that arise from climate- and weather-related events, may lead to financial crises, and what measures may be introduced to limit such possibility. Further, to better assess the impact of such financial crises, which add to the direct effect of the climate- and weather-related events that trigger them, the integrated assessment model is conceived to include income categories, an important aspect too often neglected in this literature and necessary to account for inequalities in how climate damages may affect people’s livelihoods. The integrated assessment model is also conceived to include a widely used regional decomposition. The project aims to provide clear policy lessons, analyzing the impact of a wide range of policy levers, including financial institutions, macroprudential policy, insurance schemes, and adaptation efforts, and their ability to mitigate physical risks.

Integrating sustainability concerns in financial supervision – exploring complementarities across institutional contexts

The Paris Agreement committed the signatory jurisdictions to make financial flows consistent with a net zero future. A variety of new international networks and standard setting bodies are emerging to ensure the development of adequate approaches and methodologies to ‘green finance’ across asset classes (banking, insurance, capital markets). These include the Financial Stability Board’s Task Force for Climate-Related Disclosures (TCFD), the Network for Greening the Financial System (NGFS) and the International Sustainability Standards Board (ISSB). In addition, established bodies such as the International Association of Insurance Supervisors (IAIS) and the Basel Committee for Banking Supervision (BCBS) are also developing frameworks to address risks related to sustainability transition in insurance and banking respectively. Within such globally developing ‘green finance’ frameworks, individual supervisors adopt different approaches, for example regarding the scope of sustainability concerns and regulatory tools used. 

In this context, what remains still understudied are the institutional factors that shape banking supervisors’ individual approaches. The project analyses comparatively how public authorities are using the prudential frameworks to address environmental and social risks across countries and asset classes. The different legal routes (legislative, regulatory, supervisory guidance) to introducing prudential treatment of environmental and social risks are identified for both banking and insurance at national level and juxtaposed with the emerging global standards. Factors considered in the comparative analysis include the scope of mandate, the institutional set-up (e.g. whether the supervisor is a central bank or another authority), independence and accountability mechanisms. Case studies are drawn from the supervisory practices of the ‘leaders’ of sustainable finance trend in the European Union (Banking Union, Hungary, Sweden) and beyond (Brazil, United Kingdom and China). 

The project contributes to filling three gaps in sustainable finance and related regulation and governance literatures. First, it explores the institutional design aspect of ‘greening’ prudential supervision that for now has been neglected in the scholarship on sustainable financial supervision. The ‘institutional fit’ between supervisory architectures and specific regulatory and supervisory solutions in relation to environmental and social risks (‘institutional complementarity’) is identified. Second, the project identifies the ‘balancing acts’ of supervisors in developed and developing jurisdictions with regard to risk- and non-risk aim, showing the different approaches to addressing possible policy objective trade-offs. Third, the project explores the policy layering process that takes place with regard to national practices and international standards in the field of sustainability risk integration.  

Central bank supervisory role: micro-prudential supervision and regulation of ESG risks

Recent years have seen great strides in the deepening of our understanding of how sustainability factors – in particular those related to environment, society and governance (ESG) – may act as drivers of financial risks, and therefore are of relevance to institutions responsible for oversight of the financial sector. This chapter reviews these arguments in the context of the progressive inclusion of sustainability factors in microprudential regulation of the banking sector. New rules at international (Basel Committee for Banking Supervision, Network for Greening the Financial System), regional (European Union) and individual jurisdiction levels require that banks include ESG considerations in their governance. How such rules are implemented on the ground is contingent on the regulatory oversight architecture, that is how the responsibility for different objectives and financial sectors is repartitioned between different public authorities as well as the broader institutional framework the latter operate in. The chapter analyses from this perspective practices of microprudential supervisors in the EU (European Banking Union, Hungary, Sweden) and beyond (Brazil, United Kingdom) that are seen to be leaders in the trend, with view to distil the institutional factors shaping the ‘greening’ of supervision with regard to scope of prudential sustainability concerns and the instruments used. Four out of the five studied jurisdictions have delegated banking supervision to the central bank, which is interesting not least given the significant heterogeneity of financial supervision models globally. The chapter concludes with a discussion of the implications of the comparative analysis with regard to legitimacy (e.g. market overreach) and institutional implications (e.g. need for developed for accountability, institutional design) of micro-prudential supervision and regulation, in particular with regard to central banks.