The Macroprudential Challenge of Climate Change

Despite many strides in climate risk mapping over the last years, considerable uncertainty remains about how climate change could imply systemic risk – and implications for macroprudential policies. The latest publication of the ESRB/ECB project team on climate risk has sought to address these knowledge gaps, and the case for macroprudential policies in the European Union. Work has outlined how climate-related financial vulnerabilities in the European financial system might harbour correlated shocks, hazard interdependence, as well as significant portfolio overlaps. System-wide scenario analysis suggests climate change risks could initially manifest themselves through abrupt market repricing (mainly impacting institutional investors) seeping into firm defaults with time (implying credit losses for exposed banks). Macroprudential policies have a role to play in addressing associated systemic risk, as part of a broader policy response to address the financial impacts of climate change.