The Bank of England (BoE) issued a report setting out its latest thinking on climate-related risks and regulatory capital frameworks, including the challenges it encountered and further work required in determining how climate change will impact the financial institutions it regulates, as reported by Reuters on March 13. The report found that existing capability and regime gaps create uncertainty over whether banks and insurers are sufficiently capitalized for future climate-related losses.It also acknowledged that the existing time horizons over which risks are capitalized by banks and insurers are appropriate, and there is insufficient justification for these time horizons to be changed by regulators at present. In the meantime, the BoE will continue to explore how climate risks can be calibrated within the timelines embedded in existing capital frameworks. 

BoE published the Climate Change Adaptation Report (CCAR) in October 2021, which noted that the current frameworks partly incorporate climate-related risks through capital models and credit ratings. Based on the CCAR, BoE’s latest report outlines further work required to explore whether changes to the regulatory capital frameworks are necessary. For instance, it will ensure firms continue to make progress to address capability gaps, build their capabilities and forward-looking tools to assess the financial system’s resilience to climate risks, promote high-quality and consistent accounting for climate risks, and provide a better understanding ofmaterial regime gaps in the capital framework and fix them. 

Sources:

https://www.reuters.com/business/sustainable-business/bank-england-study-climate-related-capital-further-2023-03-13/

https://www.bankofengland.co.uk/prudential-regulation/publication/2023/report-on-climate-related-risks-and-the-regulatory-capital-frameworks

https://www.ft.com/content/2b853165-7f42-4790-8506-e12eb915cf36