Managing Climate Change Risk: The Policy Options for Central Banks

This article discusses some policy options that central banks may find useful in dealing with climate change risk in the financial sector. The effect of climate change on the financial sector are indirect but severe when they occur. Central banks play an important role in regulating the financial sector and in managing its inherent risks, yet there are no studies that suggest policy solutions to help central banks and other financial sector regulators deal with the risk that climate change pose to the financial sector. Five policy options are proposed in the paper, which includes: imposing a climate change capital surcharge; impose a fixed-rate risk capital - based on Tier 2 capital; a reduction in lending to industries whose activities destroy the environment and climate; creating a climate bank; and, requiring financial institutions to relocate their important assets to areas less prone to climate change events. Several policy experiments are needed to identify the best policy option that works best for each country while taking into account the unique financial sector, financial system and climate change history of each countr