Paving the Way for Greener Central Banks. Current Trends and Future Developments around the Globe (original) (raw)

Taking up the climate change challenge: A new perspective on central banking

2020

The awareness about climate-related financial risks is gaining momentum both in the policy and academic debates. The role of countries' institutional dimension and central bank governance structures in the adoption of green prudential regulation is, however, overlooked in the current discussion. The paper fills this gap by proposing an analysis of the state-of-the-art, challenges and perspectives, of "green" central banking. The study complements existing research that usually points to an "extended" monetary policy mandate, including, for example, sustainability objectives or green growth, as the primary motivation for a central bank to engage in "green" financial policymaking. According to our research, the decision to implement green regulations is not exclusively related to the mandate per se, but on the central bank's independence and on how the interaction between the monetary and prudential policy is structured. Moreover, the higher exposure to climate-related adverse events also plays a crucial role in the adoption of green prudential regulations. To avoid potential conflicts between monetary policy and green prudential regulation caused by existing intertwined transmission mechanisms, on the one hand, our analysis emphasizes the importance of having a central bank that hosts the green prudential regulation under its governance roof. On the other hand, when the "green" governance models studied in the paper are in place, the Tinbergen principle is safeguarded.

Climate change challenges for central banks and financial regulators

Nature Climate Change, 2018

The academic and policy debate regarding the role of central banks and financial regulators in addressing climate-related financial risks has rapidly expanded in recent years. This Perspective presents the key controversies and discusses potential research and policy avenues for the future. Developing a comprehensive analytical framework to assess the potential impact of climate change and the low-carbon transition on financial stability appears to be the first crucial challenge. These enhanced risk measures could then be incorporated in setting financial regulations and implementing central banks' policies. [Main text] Achieving the objectives of the Paris Agreement will require a large-scale shift towards low-carbon technologies. However, socio-technological transitions often involve disruptive adjustments, even when they are ultimately beneficial to human welfare. 1,2 This process of 'creative destruction' is likely to take place also during the low-carbon transition, with potentially significant repercussions on economic dynamics and financial stability. 3,4 Societies thus face the challenging task of achieving a rapid structural shift to a low-carbon economy, while concurrently avoiding excessive economic losses and safeguarding the stability of the financial system (see Table 1).

Managing Climate Change Risk: The Policy Options for Central Banks

New Challenges for Future Sustainability and Wellbeing Vol: 2, 2021

This article discusses some policy options that central banks may find useful in dealing with climate change risk in the financial sector. The effect of climate change on the financial sector are indirect but severe when they occur. Central banks play an important role in regulating the financial sector and in managing its inherent risks, yet there are no studies that suggest policy solutions to help central banks and other financial sector regulators deal with the risk that climate change pose to the financial sector. Five policy options are proposed in the paper, which includes: imposing a climate change capital surcharge; impose a fixed-rate risk capital-based on Tier 2 capital; a reduction in lending to industries whose activities destroy the environment and climate; creating a climate bank; and, requiring financial institutions to relocate their important assets to areas less prone to climate change events. Several policy experiments are needed to identify the best policy option that works best for each country while taking into account the unique financial sector, financial system and climate change history of each country.

Climate change and the role of central banks

Bankarstvo, 2022

In the last few years, central banks have been exposed to new challenges and tasks that they need to face. One of those challenges is climate change, which directly affects the central bank's main goals, namely achieving and maintaining price and financial stability. In order to fulfill the goals defined by the Paris Agreement, it is necessary for central banks to take a more active part in the fight against the consequences of climate change. This means that central banks are expected to adopt policies and strategies that will guide the financial sector to successfully manage the risks of climate change and encourage them to direct investments in clean technologies and low-carbon infrastructure. This would achieve sustainable economic development in the long term, which is based on the principle of reducing the risk of climate change, while at the same time preserving the environment.

Realising Central Banks’ Climate Ambitions Through Financial Stability Mandates

Intereconomics

This paper discusses how financial stability governance has evolved and how central banks and financial regulators are coping with the threats posed by climate uncertainty, providing an overview of G20 countries’ green central banking experiences in the past 20 years. The analysis shows that most central banks realise their climate ambitions through financial stability mandates, leaving the monetary stability mandate unaffected. Considering the debate on market neutrality, the concerns on the risk of overstretching the central banks’ mandate, violation of Tinbergen’s principle and threats posed to central banks’ independence, the provided evidence reveals a mismatch between the observed policy practice and its theoretical underpinnings. Drawing on these findings, we argue that effective green central banking governance should be based on a synthesis between monetary and macroprudential policymaking.

The Central Bank’s Policy Justification in Mitigating Climate Change

Journal of Central Banking Law and Institutions

In recent years, increasing awareness of the impact of climate change has attracted the attention of central banks in a number of countries. Under their authority, some central banks have started to formulate “green policies.” These green policies include a green version of quantitative easing, buying green bonds in order to support the growth of environmentally friendly financial institutions, and imposing restrictions or prohibitions on non-environmentally friendly industry lending by banks. Bank Indonesia itself is starting to explore banking policies that are more environmentally friendly, one of which is by managing financial instruments in a sustainable manner and providing green incentives. This raises unavoidable questions about the legitimacy of Bank Indonesia’s promulgation of these environmentally friendly bankingpolicies and the issues of independence, accountability and legitimacy that accompany them. This research found that green finance policies were adopted by Bank ...

Central Banks and the Transition to a Low-Carbon Economy

SSRN Electronic Journal, 2018

Climate change is a fundamental challenge for our societies. Containing it will require a profound and radical transformation of our economic system, including a substantial reorientation of investments toward low-carbon technologies. The question to what extent central banks can and should contribute to this effort is moving up agendas worldwide. Building on the research presented at a CEP DNB workshop on "Central Banking and Green Finance" in November 2017, this discussion note explores policy options available to central banks to contribute to the transition to a low-carbon economy. The studies presented in the workshop reassert that climate change is a potential risk for the stability of the financial system. Against this background, and as a first step, central banks should develop a comprehensive evaluation of climate-related systemic risks in the financial sector. They should also consider regulatory measures to mitigate these risks, in particular by implementing higher capital requirements for loans to carbon-intensive economic activities-a measure which would support the transition to a low-carbon economy, increase capital levels and thus strengthen financial system stability. Academic research also highlights that current large-scale asset purchases by central banks are biased toward incumbent carbon-intensive sectors. Central banks should further assess these biases and ensure that climate-related risks are adequately reflected in their own balance sheets as well as their collateral frameworks.

Central Banks and Climate Change: from Black to Green Swans

Policy Center for the New South, 2020

There are three possible justifications for central banks to engage with climate change issues: financial risks, macroeconomic impacts, and mitigation/adaptation policies. Regardless of the extent to which individual central banks take action in each of the three areas, they can no longer ignore climate change. Last year, extreme weather events associated with climate change-floods, violent storms, droughts, and forest fires-occurred on all inhabited continents.

Climate change poses risks to the financial system. How can central banks deal with them

2018

Climate change poses risks to the financial system. Yet our understanding of these risks is still limited. As we explain in a recent paper, central banks and financial regulators could contribute to the development of methodologies and modelling tools for assessing climate-related financial risks. If it becomes clear that these risks are substantial, central banks should consider taking them into account in their operations. Both central banks and financial regulators might also consider supporting a low-carbon transition in a more active way so as to contribute to the reduction of these risks.