Bank of England to study climate-related capital further

(Reuters) — The Bank of England said Monday it will carry out further study on whether it needs to require banks and insurers to set aside longer-term capital buffers to provide for the consequences of climate change.

The Bank was setting out its latest thinking on how climate change will impact the financial companies it regulates.

For example, climate change may cause more flooding that destroys property financed by banks and insured by insurers.

Existing capital rules capture some of the longer-term fallout but may be incomplete due to difficulties estimating risks from climate change, the BoE said.

“Existing capability and regime gaps create uncertainty over whether banks and insurers are sufficiently capitalized for future climate-related losses,” the BoE said in a statement.

The short-term priority is for companies to get better at plugging the data gaps that prevent reliable estimates of how much capital is needed to withstand shocks.

The Bank said that existing time horizons over which risks are capitalized, usually covering a few years into the future, are appropriate for now given there is not yet sufficient justification for policy changes.

“The Bank will continue to explore how climate risks can be calibrated within the timelines embedded in existing capital frameworks,” it said.

The BoE said it would also look at whether “macroprudential,” or sector-wide buffers, could be needed, though this would be challenging.

“A macroprudential response may be justified by the fact that climate change creates foreseeable risks at the system level, but these risks are largely unquantifiable and the Bank is unable to identify which firms they will impact,” it said.

“These issues would benefit from further research to inform ongoing policy work.”

Global banking regulators are also looking at whether bespoke capital buffers are needed for climate risks.