Bailey delays the inevitable on climate capital rules

London, 16 July 2021

Asked by MPs whether climate change will be incorporated into the Bank of England’s capital rules, Bank governor Andrew Bailey has stated that further research is needed to determine whether the current framework adequately protects the financial system from the risks created by climate change.

In a letter to MPs on the Treasury Committee, Bailey wrote that while the Bank has been a firm proponent of the idea that climate change and the net zero transition create serious financial risks, “[f]urther work is needed to assess if the regulatory capital framework is robust to these risks”, or whether changes would be required to fulfill the Bank’s objective to maintain financial stability. He said that a “UK taxonomy, better data, disclosure, risk management, and scenario analysis” would help the Bank make this assessment.

David Barmes, Senior Economist at Positive Money, said:

“The Bank of England is stalling on the management of climate-related financial risks, when what we need is a proactive and precautionary approach. There’s no need for further research and analysis to recognise the particularly high risk of new fossil fuel investments and adjust capital requirements accordingly.

“Every day the Bank delays the implementation of climate capital rules, it further undermines its remit to protect financial stability and support a net-zero transition.

“The Bank of International Settlements recently proposed increasing the risk weights of cryptoassets like Bitcoin to 1250%. The same should be done for investments in new fossil fuel projects that are incompatible with the government’s net-zero targets and risk becoming ‘stranded’.”

Notes 

1. Treasury Committee, “Net Zero and the Future of Green Finance: Responses to the Committee’s Thirteenth Report of Session 2019-21”, published 16 July 2021: https://committees.parliament.uk/publications/6759/documents/72017/default/ . The Treasury Committee previously stated in its inquiry report: “In light of its new remit letter, the Bank of England must now explain its thinking, as to what measures it might consider appropriate for the capital regime to better accommodate the climate risk associated with different investments. It should set out its views on the options for amending the capital regimes to reflect its new remit, taking into account the potential interaction with the other aims of prudential policy.” 

2. Positive Money and the New Economics Foundation have published a roadmap for how the Treasury and the Bank of England can take actions to green the financial system while supporting a Build Back Better recovery: https://positivemoney.org/2021/06/encourage-green-lending-to-build-back-better-government-and-bank-of-england-told-report/

3. Positive Money is a research and campaign organisation working towards a money and banking system which supports a fair, democratic and sustainable economy. Set up in the aftermath of the financial crisis, Positive Money is a not-for-profit company funded by charitable trusts and foundations, as well as small donations from its network of over 65,000 supporters. www.positivemoney.org.

4. For more information from Positive Money or to arrange a briefing/interview with a spokesperson, please contact press@positivemoney.org.uk or Anna Pick on 07948802104.