Basel Committee on Banking Supervision Consultation Response Letter

On February 16, 2022 the Climate Safe Lending Network submitted a response to the Basel Committee on Banking Supervision on the supervision and management of climate-related financial risks.

We would like to thank all of the bankers, investors, think tanks, academics, and NGOs for all of their contributions to forming the network’s response.

Our key message is that central banks need to incorporate capital requirements alongside other measures. The capital requirements framework in Basel is referred to as pillar-1 (one) - the reason it comes first is not accidental, it’s because it is so fundamental to the effective management of risks within the financial system. Without sufficient capital banks cannot lend. They cannot absorb future losses. The system becomes over-exposed.

In 2020, the BIS published The Green Swan describing the systemic risks resulting from the high degree of certainty and extreme economic consequences of climate change or breakdown of natural living systems. It is imperative that central bankers take a meaningfully precautionary approach and support those banks trying to implement climate targets and robust transition plans by ‘levelling up’ the capital rules.

We have made practical suggestions for the feasible implementation of the ‘one-for-one’ rule which specifically targets the flow of finance to the most misaligned assets – the expansion and extraction of fossil fuels and deforestation. We include a high-level description with a worked example. This measure can be used as a practical and effective bridging mechanism to a more encompassing capital and liquidity framework over the next years whilst the results of stress tests and exploratory scenarios are examined. And it doesn’t prevent supervisory intervention for institutions who are insufficiently managing their risks.

The banking sector has become habitually resistant to any measure that might raise capital. But there is growing unease amongst those deep within the banking sector that unless and until there is adequate regulation, progress on climate action will be too slow, and we’re rapidly approaching the point where it becomes too late. Their voices are as important in this debate as those who were signalling the financial crisis of 2008 before it happened. Precautionary measures back then could have averted a crisis. The outcomes for the planet and financial stability under future climate scenarios are incomparably larger.

Read the network’s response letter here.

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