Macroprudential Systemic Capital Buffers to Address Climate Systemic Risks

Climate and environmental risks are systemic for our economies and societies. In this context, international supervisory bodies have repeatedly highlighted that climate risks are also potential systemic risks for the financial sector. Several macroprudential instruments, including systemic capital buffers, are currently discussed to address these risks. This webinar goes through the key arguments presented in a policy brief on Principles for Addressing Climate Systemic Risks with Capital Buffers, written by Satoshi Ikeda (Chief Sustainable Finance Officer, Financial Services Agency of Japan) and Pierre Monnin (Senior Fellow, Council on Economic Policies). Additionally, Laura Canas Da Costa (Global Policy Co-Lead at the UNEP FI) shares some of the key findings related to APAC from the recent UNEP FI & WWF report on Navigating Nature Related Regulations for Banks.

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  • Any systemic financial risks call for adequate macroprudential policy; climate risks are no exception to this rule. The good news is that supervisors do not need to fully recraft their macroprudential instruments to address them. With some adaptations, the toolkit developed for other systemic risks can be deployed for climate risks.

    In a recent CEP policy brief, Satoshi Ikeda and Pierre Monnin argue that systemic capital buffers must simultaneously meet two distinctive but related objectives to address such risks adequately. First, they must ensure the robustness and resilience of the financial system when climate systemic risks materialise. Second, they must contribute to containing the buildup of these risks over time.

    With this in mind, the authors propose four principles for a systemic capital buffer: absorption, prevention, individualisation, and recalibration. The combination of these principles would induce financial institutions to increase their robustness to climate systemic shocks and support their clients’ transition and adaptation efforts, thereby addressing the root cause of climate change and mitigating its systemic risks.

  • Pierre Monnin is a Senior Fellow at CEP and a Visiting Professor in Practice at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science. He works on central banking, monetary policy, and financial regulation, focusing on their environmental and social sustainability interdependencies. Before joining CEP, he worked for the Swiss National Bank (SNB) in various roles for ten years, as well as in the financial industry.

    Aziz Durrani leads the Technical Assistance function at AMRO. His work includes advising on climate and nature-related risks and on green and sustainable finance policies. Aziz was previously a Senior Technical Risk Specialist at the Bank of England where, amongst other things, he managed the Bank’s collateral refinancing expansion program following the GFC.

    Laura Canas Da Costa is the Global Policy Co-Lead at the UNEP FI, responsible for managing UNEP FI’s engagement with financial regulators and supervisors, to strengthen industry positioning and relevance, and to foster progressive and proactive regulatory action informed with practitioners’ perspectives. Prior to joining UNEP FI, Laura was a Sustainable Finance Policy Manager at Credit Suisse. She has also worked on sustainable finance and infrastructure topics for WWF Switzerland, SUSI Partners and KfW Bank among others. In addition, Laura is a guest lecturer on sustainable finance and infrastructure topics at the Frankfurt School of Finance, University of Zurich and Hochschule für Technik Stuttgart.