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18 - Macroprudential Policies and Climate Risks

from Part IV - Ensuring Financial Stability and Sustainability

Published online by Cambridge University Press:  30 January 2025

By
Seraina Grünewald
Edited by
Kern Alexander ,
Matteo Gargantini  and
Michele Siri
Kern Alexander
Affiliation:
University of Zurich
Matteo Gargantini
Affiliation:
University of Genoa
Michele Siri
Affiliation:
University of Genoa
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Summary

It has become widely acknowledged that the looming climate crisis and the necessary transition to a low-carbon economy can and will be financially material for financial institutions. Accordingly, microprudential supervisors have started including climate-related financial risks in their daily practices. Comparatively less attention has been given to the role macroprudential policies may play in addressing these risks from a system-wide perspective. This paper tackles climate risks as a macroprudential concern. It argues that macroprudential policies may play a key part in assessing and managing these risks, deploying new methodological means to map and model existing and evolving climate risks under different plausible scenarios. Insights from scenario analysis may help inform the use of ‘hard’ macroprudential tools to foster the robustness and resilience of the banking system against climate-induced shocks. Against the backdrop of the ongoing reform of the EU’s macroprudential framework, the paper explores how the macroprudential toolkit could be adjusted to the reality of climate-related financial risks.

Keywords

climate-related financial risksmacroprudential policiesmateriality of risksmacro-stress testingphysical riskstransition risksmacroprudential toolkit
Type
Chapter
Information
The Cambridge Handbook of EU Sustainable Finance
Regulation, Supervision and Governance
 , pp. 473 - 492
Publisher: Cambridge University Press
Print publication year: 2025

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