EBF: Pillar 1 capital charge for climate risk: Wrong tool for the right purpose
09 May 2022
Two years ago, governments, supervisors and regulators pleaded banks to use their capital, reducing the ratios, in order to keep on financing the economy after the outbreak of the pandemic.
We learnt some lessons:
- The prudential status of the banking system is solid enough to withstand a major unexpected shock.
- However, the EU regulatory framework is too rigid. Too much weight
has been put on Pillar 1 measures. So much, that authorities were
trapped when their intervention was necessary.
- As a consequence, a regulatory quick fix had to be promptly enacted
in order to ease off Pillar 1 measures and let banks play their role as
part of the solution.
- Since then, global standard setters, central bankers, prudential
regulators and academics, are discussing about how to make the
prudential framework more flexible without detriment to its level of
confidence. Flexibility means less hardwired regulation and more
manageable and targeted prudential tools.
Climate change will bring about new risk considerations. The
prudential framework offers multiple tools to tackle them progressively.
Some argue that hardwired Pillar 1 capital increases by means of
risk-weighted adjustment factors should be imposed. The lesson of the
pandemic taught us that Pillar 1 is not the right measure at this point.
It would make the regulation more rigid but not more robust.
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