Banking system and climate-related prudential regulatory tools

What is it about?

Central banks are considering sustainable and responsible investment (SRI) in their agenda to align national financial systems towards internationally-agreed climate goals. The academic research community is also investigating how to integrate climate risk into the prudential regulation tools available to financial regulators. A concentration of research in developed countries, mainly in Europe, and a significant increase in the publication of studies has been observed in recent years. Scientific research has focused on five prudential regulatory tools: disclosure requirements, climate-related stress testing, differentiated capital requirements, targeted refinancing lines, and green finance guides and frameworks.

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Photo by Li-An Lim on Unsplash

Photo by Li-An Lim on Unsplash

Why is it important?

Research gaps identified include green bubble, double materiality, interaction between policies, compound risks, banking governance, and small and medium-size enterprize (SME) banking. They are cross-cutting issues that could increase the body of knowledge on climate-related prudential regulation tools. These findings can serve as a reference for the further development of a harmonized international framework to address climate risk in banking.