Climate Change as a Systemic Risk – Are Macroprudential Authorities up to the Task?

Abstract

There is growing acknowledgement among policymakers that climate change may give rise to potentially catastrophic financial risk and impact financial stability. This paper explores the specific features of climate-related financial risks (CRFR), drawing on a growing body of macrofinancial literature and policy work, and discusses the options macroprudential policy-makers have in the face of such risk. It finds that there are significant challenges associated with ‘greening’ macroprudential policy, both epistemological and methodological as well as behavioural, and points to potential ingredients of a ‘green’ macroprudential policy. In light of the radical uncertainty in relation to the dynamics of CRFR, the timing of policy action is of the essence. The paper, in particular, explores the merits and challenges associated with a precautionary approach to tackling the systemic effects of CRFR. Finally, it discusses the role that Central Banks can and should play in the transition to a low-carbon economy, both within the confines and in fulfilment of their price and financial stability mandates.

Keywords: climate change, climate-related financial risk, systemic risk, financial stability, macroprudential policy, Central Banks

JEL Classification: E58, G01, G21, G28, K23, Q58