BoE reports on climate risks and regulatory capital frameworks

The BoE has set out its latest thinking on climate-related risks and regulatory capital frameworks. The report includes updates on:

  • capability and regime gaps;
  • capitalisation timelines; and
  • areas for future research and analysis.

This report follows the BoE’s Climate Change Adaptation Report (CCAR), published October 2021, which identified that current frameworks do capture climate-related risks to some extent, but that risk capture may be incomplete due to difficulties in estimating capability and regime gaps. In the CCAR, the BoE committed to undertaking further analysis of these topics. The results are captured in this latest report, although it does not propose any policy changes.

The BoE stated that there was no sufficient justification for regulators to make policy changes to existing time horizons over which risks are capitalised by institutions, because existing timelines are appropriate for climate risks. However, it promised to undertake further analysis on whether changes to regulatory capital frameworks would be required.

The report concluded that existing capability and regime gaps create uncertainty over whether banks and insurers are sufficiently capitalised for future climate-related losses. The BoE suggested that effective risk-management controls from PRA-regulated firms might reduce the amount of capital required for future resilience, but noted that the absence of controls might suggest a greater requirement. As a short-term priority, it identified that firms should address capability gaps to improve their identification, measurement and management of climate risks.

Laura Wiles