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Are Current Prudential Frameworks Up to the Challenge of Climate Risks?

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  • D’Orazio Paola

    (Ruhr-Universität Bochum, Germany.)

Abstract

Climate and environmental issues will likely impact the financial system’s stability as they become more pervasive and tangible. As a result, the appropriate financial regulatory and supervisory measures must be in place. This article discusses the challenges faced by financial institutions and the financial system due to the materialisation of climate and environmental risks and the shortcomings in current prudential frameworks. The arguments presented suggest that if the fundamental goal of the Paris Agreement-aligned transition is to phase out coal-fired energy, reduce oil and gas use, and transform carbon-intensive businesses, improving bank governance supervision and/or fostering climate-related disclosure requirements may not be enough. A critical role is instead played by capital requirements that adequately consider climate risks. Moreover, since microprudential tools are typically focused on direct exposures, they may not be sufficient to address the systemic dimension of climate risks. Macroprudential measures should therefore not be overlooked.

Suggested Citation

  • D’Orazio Paola, 2023. "Are Current Prudential Frameworks Up to the Challenge of Climate Risks?," Intereconomics: Review of European Economic Policy, Sciendo, vol. 58(2), pages 96-101, March.
    • Handle: RePEc:vrs:intere:v:58:y:2023:i:2:p:96-101:n:12
    DOI: 10.2478/ie-2023-0020
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    References listed on IDEAS

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    1. Abhijeet Ghadge & Hendrik Wurtmann & Stefan Seuring, 2020. "Managing climate change risks in global supply chains: a review and research agenda," International Journal of Production Research, Taylor & Francis Journals, vol. 58(1), pages 44-64, January.
    2. D’Orazio, Paola & Popoyan, Lilit, 2019. "Fostering green investments and tackling climate-related financial risks: Which role for macroprudential policies?," Ecological Economics, Elsevier, vol. 160(C), pages 25-37.
    3. Nadia Ameli & Paul Drummond & Alexander Bisaro & Michael Grubb & Hugues Chenet, 2020. "Climate finance and disclosure for institutional investors: why transparency is not enough," Climatic Change, Springer, vol. 160(4), pages 565-589, June.
    4. Lane, Philip R., 2019. "Climate Change and the Irish Financial System," Economic Letters 1/EL/19, Central Bank of Ireland.
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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