The Bank of England said there was “uncertainty” over whether banks and insurers are “sufficiently capitalised” to deal with climate-related risks, but suggested there was not enough justification to increase their capital requirements at the moment.
In a report published today, the Bank said climate risks create a challenge for regulators as the uncertainty surrounding climate risks are difficult to assess relative to the regulator’s own risk appetites.
In particular it highlighted the problem of estimating climate risks and then capturing those risks in existing capital regimes. This is because climate risks are more long term than many other forms of financial risk.
Despite highlighting the uncertainty, the Bank said current evidence suggests that the existing timescale over which banks and insurers hold capital are appropriate for climate risks.
“There does not appear to be sufficient justification for regulators, including the Bank, to make a policy change to these time horizons,” it said.
The report confirms statements made at the Treasury Committee last week by Sam Woods, head of the Prudential Regulation Authority (PRA). Woods said fallout from climate change would manifest itself over a long period of time, making it more a “pay as you go” rather than a capital upfront type of risk.
Regarding the difficulties of estimating climate risks, the Bank said that a “short-term priority” is to ensure firms improve their “identification, measurement, and management of climate risks”.
The Bank said firms need to do more on embedding effective risk management in their controls which may help to reduce the capital that firms need to hold in future.
The report did not set out any policy changes with the Bank saying it needs to undertake further analysis before reaching a decision.
Economist at the New Economics Foundation Lukasz Krebel criticised this lack of action.
“Climate-related risks pose a grave and growing threat to the stability of the financial system… It is therefore worrying that the Bank of England acknowledged that actions we take now will influence how serious these risks will grow but failed to act following its capital requirements review,” he said.