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Britain’s banks face capital crackdown on climate risks

Britain’s banks face capital crackdown on climate risks

CENTRAL BANK. A person walks past the Bank of England in London, Britain, October 22, 2021.

Tom Nicholson/Reuters

Climate-related financial risks are partially captured by current frameworks, but there are gaps, says the Bank of England

The Bank of England (BoE) said on Thursday, October 28, it will crack down on banks and insurers that fail to hold enough capital to cover risks from climate change from next year, as it studies whether bespoke safety buffers are needed.

Climate-related financial risks are partially captured by current frameworks, but there are gaps, the BoE said in a report on adaption to climate change that marks a shift in thinking.

The BoE already has powers to force banks and insurers to top up their general capital buffers if climate risks are not sufficiently covered, and it will study whether bespoke company and sector-wide climate buffers are also needed.

“This work will help determine whether changes to the design, use, or calibration of the regulatory capital framework may also be needed to ensure resilience against these risks,” the BoE said in a statement.

“We will provide an update on our approach in 2022 following a call for further research and a conference on climate change and capital requirements.”

The BoE said in 2019 that banks and insurers should set out by the end of 2021 how they manage risks from climate change and disclose them.

The bank said in a report on Thursday that the firms it regulates have made “tangible progress” in meeting these expectations, but some are materially more advanced than others, and the bank signaled a shift in gears next year in how it supervises and enforces these requirements.

“As we move into 2022, the PRA will actively supervise to ensure firms meet expectations, with firms needing to demonstrate a good understanding and management of climate-related financial risks on an ongoing basis,” it said.

“In the report we highlight that we will consider the use of our full supervisory and regulatory toolkit to provide the necessary assurance or remediation where appropriate.”

Enforcement can range from warnings to mandatory capital top-ups and even fines.

Separately, the Financial Conduct Authority (FCA) in its own report said it will scrutinize how well the environmental, social, and governance characteristics of products align with the claims firms make on sustainability.

“Increased capital requirements for some banks and insurers seems highly likely and enforcement action by FCA is a clear threat,” said Paul Edmondson, a financial services partner with law firm CMS.

The global Basel Committee, which writes norms on capital requirements applied by Britain and other leading financial centers, is due to publish an update on its own work on whether climate buffers are needed.

The BoE, a member of Basel, is expected to be aligned with the global work. –