Climate Change: Will climate change lead to the next financial crisis?

BIS, the umbrella organisation of central banks, recently warned on global financial stability

Published: Friday 24 January 2020

Will climate change be the reason for the global financial crisis. Basel-based Bank of International Settlement (BIS) thinks so.

BIS, the umbrella organisation of central banks, recently warned on global financial stability. Central banks of various countries across the world are not equipped to deal with the situation, according to its report.

“Climate change poses unprecedented challenges to human societies, and our community of central banks and supervisors cannot consider itself immune to the risks ahead of us,” said François Villeroy de Galhau, governor of the Banque de France, in a note in the report.

The report, titled Green Swan is a take on the book Black Swan by author and options trader Nassim Nicholas Taleb. Green Swan signifies happening that are beyond human expectations but extremely disruptive. In case of climate change, it simply means that old models of climate predictions may not be enough to ensure financial stability in the future.

“There is a high degree of certainty that some combination of physical and transition risks will materialise in the future,” according to the report. The report comes in the wake of the Australian bushfire and the warmest decade on record. Galhau makes a case in his note that all financial and forecasting models must incorporate the element of global warming.

The report says integrating climate-risk analysis into financial stability monitoring and supervision is challenging because of varied climate change impacts and mitigation strategies adopted by different governments. The report calls for “a second epistemological break.”

It wants central banks need to coordinate their own actions with a broad set of measures  to be implemented by other players such as governments, industries and civil societies. It says financial and climate stability are interconnected public goods and this consideration can be extend to other problems such as the loss of biodiversity.  

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