(Reuters) — The Bank of England said on Monday it will carry out further studies on whether it needs to require banks and insurers to set aside long-term capital buffers to deal with the consequences of climate change.
The bank presented its latest thinking on how climate change will affect the financial companies it regulates.
For example, climate change could cause more floods that destroy property financed by banks and insured by insurance companies.
Existing capital rules capture some of the long-term fallout but may be incomplete due to difficulties in estimating risks from climate change, the BoE said.
“Existing capacity and regime gaps create uncertainty about whether banks and insurers are adequately capitalized for future climate-related losses,”; the BoE said in a statement.
The short-term priority is for companies to get better at closing the data gaps that prevent reliable estimates of how much capital is needed to withstand shocks.
The bank said existing time horizons over which risks are capitalized, which typically cover a few years into the future, are appropriate for now because there is not yet enough justification for policy changes.
“The Bank will continue to explore how climate risks can be calibrated within the timelines embedded in existing capital frameworks,” it said.
The BoE said it would also examine whether “macroprudential” or sector-wide buffers might be needed, although this would be challenging.
“A macroprudential response may be motivated by the fact that climate change creates predictable risks at the systemic level, but these risks are largely unquantifiable and the Bank cannot identify which firms they will affect,” it said.
“These questions would benefit from further research to inform ongoing policy work.”
Global banking regulators are also looking at whether tailored capital buffers are needed for climate risks.