A climate change triggered financial crisis would render central banks and financial supervisors powerless, warns a new book by experts from the Bank for International Settlements, a bank for central banks, and Banque De France, the French central bank.
Current trends could leave central banks in the position of “climate rescuers of last resort,” but there is little monetary policy and putting more money into the system could do to stem the “irreversible” impacts, the authors claim describing the impact of “green swan” risks.
In “The Green Swan: Central Banking and Financial Stability in the age of climate change,” they caution an abrupt change to low-carbon economies with significant stranded assets could spark fire sales by investors which in turn could trigger a financial crisis.
Another danger, they assert is banks whose balance sheet would be hit by credit and market risks could be unable to refinance themselves in the short term, potentially leading to tensions on the interbank lending market.
They say attacking climate change requires unified efforts within national governments.
“The prime responsibility for ensuring a successful low-carbon transition rests with other branches of government, and insufficient action on their part puts central banks
at risk of no longer being able to deliver on their mandates of financial (and price) stability,” the authors contend.
They call on central banks to increase their potential effectiveness in mitigating damage from climate change to expand their roles and become advocates for broad socioeconomic changes which could lessen the problem
As potentially helpful actions, they say central banks could help proactively promote long-termism by supporting the values or ideals of sustainable finance and increase cooperation on ecological issues among international monetary and financial authorities.
In addition, they said the banks could push for an increased role for fiscal policy in support of the transition to lower-carbon economies.
In a forward to the book, Bank of International Settlements General Manager Agustin Carstens calls upon central banks to conduct monitoring of climate-related risks through adequate stress tests; developing new methodologies to improve the assessment of climate related risks; including environmental, social and governance (ESG) criteria in their pension funds.
The authors urge central banks to work closely with the financial sector on disclosure of carbon-intensive exposure to assess potential financial stability risks.
