Sustainability and prudential banking regulation

Sustainability concerns have not remained without effect on banking regulators, many of which have put great efforts in understanding how sustainability risk may affect the safety and soundness of banks. This chapter puts forward the normative claim that sustainability represents a prudential concern, setting out the conceptual framework that has emerged to capture climate-related risks and discussing the challenges associated with integrating these risks in the prudential framework. The comparative analysis of the regulatory regimes of the US, UK, EU, Switzerland, and Singapore undertaken in this chapter produces two key findings. First, while pillars two and three of the prudential framework, dealing with risk management and supervision as well as disclosure, are sufficiently flexible to accommodate the specificities of climate risks, adjustments to the rules-based pillar one have proved more challenging. And second, within pillars two and three, approaches taken by the observed jurisdictions differ significantly in terms of their scope and ambition. The largest differences arguably exist regarding the ability of supervisors to follow up with supervisory measures in case banks fail to meet their climate-related prudential expectations.