Designing a macroprudential capital buffer for climate-related risks
Retrieved on:
火曜日, 5月 28, 2024
Methodology, Pressure, Risk, GVA, CRD, Investment, Bank of France, Research Papers in Economics, Social science, Section 3, FSB, Central bank, European, Learning, Canadian International Council, JEL, Ghent University, LGD, GDP, Figure, Section 5, Capital Requirements Directives, ESRB, EAD, ECB, Credit, Probability, Climate change, Journal of Financial Economics, Flood, Reproduction, A4, Corporate finance, Eurosystem, Element, Sale, Ecological economics, Sis, Civil service commission, FSI, European Commission, PPT, Gropp, Financial economics, NGFS, Table, Financial intermediary, Review of Economic Dynamics, LSI, Financial statement analysis, Prudential, DSGE, INSPIRE, CEP, Single, European Central Bank, Paper, RWA, Employment, Literature, Calibration, Medical classification, Network, Journal of Financial Stability, Financial regulation, Wildfire, Mask, Geography, Carbon, ADBI, E61, Research, ISSN, Policy, Climate, Coelho, G21, Environment, Section 2, Robustness, Constantine Dafermos, AnaCredit, Temperature, Acceleration, SSM, PDF, CST, Website, Data, Tax, Council, Section 4, Translation, Bank of England, CEIS, Exercise, Map, BCBS, European Parliament, Buffer, Double, NFC, Bank, Financial system, Growth, NACE, SHSS, Management science, EBA, Electricity, Risk management
Abstract
Key Points:
- Abstract
Amid the growing financial vulnerabilities posed by climate change, we investigate macroprudential capital buffers to mitigate systemic risks and increase the resilience of the banking
sector. - Subsequently, we introduce a methodological framework for tailoring bank-specific buffer requirements to cover these losses, offering macroprudential authorities a practical method for
calibrating climate-related macroprudential capital buffers, complementing microprudential
policies. - The study demonstrates the potential of macroprudential capital buffers to mitigate potential climate-related losses and contributes to the
understanding of the appropriate prudential policy response to these challenges. - Second, we propose a calibration methodology for a macroprudential capital buffer which
allows to address the build-up of climate-related systemic risks in the banking sector. - The
proposed calibration methodology assigns different systemic risk buffer requirements to banks
in different buckets depending on each bank?s exposure to the estimated climate risks. - Our findings highlight the potential systemic relevance of climate
risks, while the proposed methodology demonstrates the potential of macroprudential capital
buffers to mitigate climate-related losses. - Overall, this paper makes a significant
step towards operationalizing macroprudential capital buffers for climate-related risks, and can
inform prudential authorities? reflections on how to concretly implement macroprudential tools
to address the build-up of these risks. - Yet, despite the growing consensus on the systemic features of climate risks,
the discussion on the concrete implementation of macroprudential tools for climate risk is only
incipient. - This paper explores how climate risks should be accounted for in the regulatory framework,
providing an analysis of how macroprudential capital buffers can be tailored to effectively address
the systemic aspects of these specific risks. - In Section 2, we discuss the current
policy context around macroprudential policy targeting climate-related systemic risk, as well as
the positioning of the paper in the existing academic literature. - As part of the discussion on incorporating climate-related risk considerations into the prudential framework, macroprudential tools, including capital buffers, are increasingly being considered to address systemic aspects of climate-related risks, complementing microprudential
measures. - Yet, no common methodology currently exists to calibrate such buffer, which may hinder
its actual use to address climate risks, should macroprudential authorities decide to use it. - Our paper also contributes to the policy discussion by tackling some of the challenges
which have been identified regarding the use of macroprudential tools for climate risks. - In
particular, ECB-ESRB (2022) identify the complex calibration as one of the hurdles to overcome
in order to implement a climate SyRB. - (2023) also estimate US banks? exposure to transition risk based on the carbon footprint of
their syndicated loan portfolio. - 7
Similarly, earlier work by Campiglio (2016) suggests the use of green macroprudential policy in stimulating
banks to finance low carbon activities. - ECB Working Paper Series No 28xx
10
brown firms could actually even cause a reduction in lending to green firms via a crowding-out
effect. - We contribute to this literature by proposing a harmonized methodological framework,
based on a stress test methodology and granular supervisory data, to quantify a macroprudential capital buffer requirement to tackle climate-related risks in the euro area banking sector. - 23
The extent to which the climate SyRB might overlap with other capital (buffer) requirements can also be
used to inform macroprudential authorities? decision on the optimal calibration factor, as discussed in Section 3.3
and 4.3. - The proposed
bucketing methodology also provides macroprudential authorities with sufficient flexibility to
tailor the framework to the particularities of each jurisdiction (EBA, 2020). - Finally, when implementing a bucketing approach, macroprudential authorities need to be
mindful that such approaches have the potential to cause cliff effects. - Hence, a
bucketing approach translating bank-specific projected transition risk losses into capital addons appears to be both more prudent and more efficient. - Assuming
financial institutions do not hold additional provisions beyond the current policies scenario,
transition risk losses will directly affect their capital positions. - We define the excess CET1 ratio
as the bank?s CET1 ratio minus the sum of all capital and buffer requirements (including P2G). - The SyRB is therefore able to
almost fully offset the impact of a transition shock on capital positions at the system-wide level. - 31
Assuming banks preserve their capital buffer in response to this increase in capital requirements.
- As an example, macroprudential authorities? assessment of the potential overlap of
the climate SyRB with other capital (buffer) requirements may be helpful in this discussion. - The scenario
used for calibration of a macroprudential capital buffer like the SyRB will need to be chosen
carefully to correctly identify realistic sources of systemic risk, including the potential interaction
between transition risk and physical risk. - Fourth, concrete implementation would need to ensure that macroprudential capital buffers are
not targeting climate-related risks already covered by other microprudential or macroprudential
capital (buffer) requirements, to avoid any overlap of requirements and double-counting of risks.