In this article for the Center for Economic Policy Research, Paul Hiebert, Head of Systemic Risk and Financial Institutions Division European Central Bank, outlines why a macroprudential approach is required to manage climate risk.
A macroprudential approach aims to reduce the risk of a financial crisis by identifying and addressing risks to the entire financial system through the regulatory framework. The goal is to mitigate systemic risks and lower the macroeconomic costs of financial instability. Macroprudential regulation is necessary for bridging the gap between macroeconomic policy and traditional microprudential regulation.
This article discusses a new surveillance framework for monitoring climate-related financial stability risks. The framework consists of three building blocks: climate shocks, typology of exposure to shock and the potential for financial risk resulting from the interaction of exposure and vulnerabilities. The goal is to better inform the policy response options that can be leveraged to manage climate risk within uncertainty and complex systems.