Climate risk is now in the banking supervisors’ bible. Is it a big deal?

Usually when 200 or more central bankers gather together, the world economy has just fallen off a cliff.

That wasn’t the case this week. Instead, the guardians of the global financial system congregated in Switzerland to endorse revised Core Principles for effective banking supervision drafted by the ultimate arbiters of financial rulemaking, the Basel Committee on Banking Supervision (BCBS). 

It was kind of a big deal. The Core Principles are the bible of bank oversight, and are rarely updated – indeed, the last time was in 2012. They are also used by the International Monetary Fund (IMF) and Word Bank to test the strength of countries’ supervisory architecture, which means adhering to the Principles can go some way to determining whether or not a nation gets a clean bill of health from these entities. For developing countries looking to the IMF and World Bank for financial support, this is not something to mess around with. 

What makes this revision of the Core Principles especially significant is that, for the first time, it explicitly includes climate-related financial risk as something to be incorporated in bank oversight frameworks, and in lenders’ own risk management practices. This development led to a measure of jubilation among climate hawks, who took it as evidence that the global financial system was now united in treating climate change as a financial risk worth tackling.

Indeed, the stature of the Core Principles led the European Central Bank’s Frank Elderson, perhaps the hawkiest of climate hawks to compare them to the Magna Carta.  Of course, it’s worth remembering that the original Magna Carta, an ostensible bill of rights intended to curb royal power, was not honored by King John or his nobles, leading to civil war.  Perhaps not the analogy Mr Elderson wished to draw!

But do the Core Principles have sufficient substance on climate risk to be worthy of such comparisons in the first place?  Let’s dig in.