Climate change: causes vs financial impacts

Speech by Sam Woods, Bank of England´s Deputy Governor for Prudential Regulation talking on recent tests on the UK’s largest banks and insurers on how prepared they are for financial risks caused by climate change. In its view, the role of prudential authorities is to ensure the financial system can withstand the financial risks arising from climate change but not to address directly the causes of climate change. That depends on decisions of governments and parliaments, not financial regulators.

Main conclusions of the speech:

• Climate change is now in the spotlight of prudential regulators around the world to ensure the safety and soundness of banks and insurers, so that they can continue to provide vital financial services to the real economy under any climate scenario. In this regard, the transition to net zero emissions will be a major challenge for our institutions and societies, and it will require substantial investments that without confidence in the basic functioning of the financial system would be almost impossible.
  
  
• Climate risk financial impact will be captured in capital requirements of financial institutions: capital requirements are one way of providing resilience against banks and insurers losses in the transition to Zero Emissions. But in his view, “it is not yet clear that the magnitude of transition costs require a fundamental recalibration of capital requirements for the system”.
  
  
• Financial regulators and capital requirements are not the best tool to directly address the causes of climate change as according to him “how to address the causes of climate change is a decision for governments and parliaments”.