Capital requirements instituted in the wake of the financial crisis are not fit to deal with the risks climate change poses. Following the 2008 crash, which necessitated massive bailouts of under-capitalised financial firms, regulators have significantly revamped and tightened requirements for banks under the internationally agreed Basel III framework.
As ever, policy-makers set out to ‘fight the last war’ by developing risk metrics and mitigation measures calibrated on backward-looking data and the 2008 experience. So while the reforms have improved the resilience of banks against traditional sources of financial risk, they were not designed to tackle the emerging climate-related risks.
