Climate-Related Financial Risks
and
the Role of Central Banks
Fatih Kansoy
Outline
What we are going to learn
The fundamental definitions and approach
The mechanism and transmission channeles of risks
The potential roles of central banks
What we have learned - Q & A Time
Main Definitions
According to NASA; climate change describes a change in the average conditions — such as temperature and rainfall — in a region over a long period of time
What is climate change?
Why climate crises but not climate change.
It's a crisis, not a change. Thus, climate change is no longer considered to accurately reflect the seriousness of the overall situation.
What are the climate-related financial risks?
Climate crisis is likely to increase the severity and frequency of extreme events
These events can lead to property damages, lower productivity and severe economic disruptions that could result in financial losses.
Such losses could destabilise both the insurance sector and the banking system.
The Mechanism
Two channels, but many potential impacts.
| Climate Risks | Economic Risks |
Financial Risks |
Financial Stability Risks | |
|---|---|---|---|---|
| Real Estate | Rising sea levels, frequency of storm surges | Increased inundation of coastal parcels |
Decreased value of coastal real estate |
Abrupt repricing of mortgage lending markets |
|
Insurance |
More frequent and severe hurricanes, wildfires, etc. |
Greater disruption to local economic activity |
Pressure for higher rates, lower supply of insurance and reinsurance | Greater uninsured losses, spillover effects |
Two Real-World Examples
Central Banks
Central Bank: The Owner of Carrot-and-Stick
Brown-Penalizing vs Green-Supporting
-
Offering loans at a below-market rate to support ‘environment businesses’ (B. of Japan)
-
Credit quota: Bank loans should be directed to environmental friendly sectors (Bangladesh)
-
Using Environmental, Social, and Corporate Governance (ESG) criteria for the government’s pension fund and excludes coal-based energy companies (The Norge Bank)
-
Green Quantitative Easing (ECB)
ESG
Thesis Idea
BUT...
-
Unelected Power.
-
The new & most powerful main decision-maker.
- The Fed did not rescue Lehman but rescued Bear Stearns and AIG. Why?
Democratic Legitimacy
BUT...
Too many jobs to do...
- Economic Growth / Full Employment
- Financial Stability
- Banking Supervision and Regulation
- Dealing with Pandemic
- Micro & Macroprudential Policies
- Inequality
- ....
- ....
and - Climate crisis
What we have learned
Recap - Let test your self
What we have learned
-
Two main channels
-
To many impacts on financial stability
-
Central Banks' indirect responsibility
-
Brown Penalities and Green Supports
- Discussions on the role of CB
Questions?
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By kansoy
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Fatih Kansoy - Central Bank and Climate Change
