Climate Change as a Systemic Risk in Finance: Are Macroprudential Authorities Up to the Task?

There is broad acknowledgement amongst policymakers that climate change may give rise to material financial risk and impact financial stability. This chapter explores the specific features of climate-related financial risks (CRFR), drawing on a growing body of macrofinancial literature and policy work, and discusses the role of macroprudential policy in the face of such risk. It finds that macroprudential policymakers are confronted with significant challenges, epistemological and methodological as well as behavioural, when addressing CRFR. In light of the (partial radical) uncertainty in relation to the future dynamics of CRFR, the timing of policy action is of the essence. The chapter, in particular, discusses the merits and challenges associated with a precautionary approach to tackling the systemic effects of CRFR. It also assesses how CRFR could be fit into the existing macroprudential toolkit, with a focus on capital buffers and borrower-based tools.