Climate-Related Risks, Systemic Risks, and Macroprudential Regulation

Climate risks pose significant financial challenges that align with the stability mandates of central banks and supervisors. They can lead to economic losses impacting households, firms, and financial institutions, potentially threatening financial stability. Current supervisory efforts have focused on microprudential policies, with the Basel Committee on Banking Supervision (BCBS) establishing a comprehensive approach across the Basel Framework’s three pillars. However, the systemic nature of climate risks necessitates macroprudential responses as well. Like other systemic risks, climate risks are widespread in financial markets and can lead to amplified financial disruptions. However, unlike other systemic risks, climate risks are foreseeable and irreversible, although they are subject to uncertainty in timing and outcomes. This chapter argues that effective macroprudential measures, such as systemic capital buffers and concentration limits, can enhance resilience and mitigate future risks but require careful calibration to avoid adverse effects. Against this background, and given that immediate action is essential to prevent delayed responses that could exacerbate financial instability, central banks and supervisors could prioritize large institutions and high-risk sectors in initial implementations.