Central Bank Supervisory Role: Micro-Prudential Supervision and Regulation of ESG Risks

Forthcoming in: Kern Alexander and Seraina Grünewald (eds.), Central Banking and Sustainability, Cambridge University Press

23 Pages Posted: 12 May 2023 Last revised: 3 Jan 2024

See all articles by Agnieszka Smoleńska

Agnieszka Smoleńska

European Banking Institute; Institute of Law Studies (PAN)

Date Written: April 30, 2023

Abstract

Recent years have seen great strides in the deepening of our understanding of how sustainability factors – in particular those related to environment, society and governance (ESG) – may act as drivers of financial risks, and therefore are of relevance to institutions responsible for oversight of the financial sector. This chapter reviews these arguments in the context of the progressive inclusion of sustainability factors in microprudential regulation of the banking sector. New rules at international (Basel Committee for Banking Supervision, Network for Greening the Financial System), regional (European Union) and individual jurisdiction levels require that banks include ESG considerations in their governance. How such rules are implemented on the ground is contingent on the regulatory oversight architecture, that is how the responsibility for different objectives and financial sectors is repartitioned between different public authorities as well as the broader institutional framework the latter operate in. The chapter analyses from this perspective practices of microprudential supervisors in the EU (European Banking Union, Hungary, Sweden) and beyond (Brazil, United Kingdom) that are seen to be leaders in the trend, with view to distil the institutional factors shaping the ‘greening’ of supervision with regard to scope of prudential sustainability concerns and the instruments used. Four out of the five studied jurisdictions have delegated banking supervision to the central bank, which is interesting not least given the significant heterogeneity of financial supervision models globally. The chapter concludes with a discussion of the implications of the comparative analysis with regard to legitimacy (e.g. market overreach) and institutional implications (e.g. need for developed for accountability, institutional design) of micro-prudential supervision and regulation, in particular with regard to central banks.

Keywords: microprudential supervision, capital requirements, climate change risk, ESG risk, supervisors, ECB, Bank of England, Central Bank of Brazil

JEL Classification: G15, G18, G21, G32, K23

Suggested Citation

Smoleńska, Agnieszka, Central Bank Supervisory Role: Micro-Prudential Supervision and Regulation of ESG Risks (April 30, 2023). Forthcoming in: Kern Alexander and Seraina Grünewald (eds.), Central Banking and Sustainability, Cambridge University Press, Available at SSRN: https://ssrn.com/abstract=4446375

Agnieszka Smoleńska (Contact Author)

European Banking Institute ( email )

Institute of Law Studies (PAN) ( email )

Polish Academy of Sciences
Nowy Świat
Warsaw

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