Climate-related Risks and Central Banks Collateral Policy: a Methodological Experiment

Oustry Antoine, Erkan Bunyamin, Romain Svartzman and Weber Pierre-Fran Ois

Working papers from Banque de France

Abstract: Central banks increasingly acknowledge that climate change is a source of financial risks, which is likely to also impact their conduct of monetary policy. Against this backdrop, the aim of this paper is to explore one potential approach to factoring climate-related transition risks into a central bank s collateral framework. Given the radical uncertainty associated with measuring such risks, this approach relies on so-called climate alignment methodologies, which enable to assess the consistency of eligible and pledged marketable assets with specific climate targets. Moreover, this paper proposes a climate-hedging portfolio approach : instead of seeking to align the collateral on an asset-by-asset basis, central banks could aim for alignment , in aggregate, of the collateral pools pledged by their counterparties with a given climate target. The rationale for this choice is that assessing climate-related risk at the pool level avoids the Eurosystem having to decide on which assets/issuers in the pools should be excluded or capped, and is therefore more compatible with a market neutrality approach. The numerical experiment using Eurosystem marketable criteria data suggests that, in aggregate, neither the Eurosystem eligible collateral universe nor the collateral pledged is aligned with the climate targets of the European Union. From this perspective, the Eurosystem marketable collateral can be considered to be exposed to climate-related transition risks. We discuss the potential practical implications of aiming to align collateral pools, and suggest avenues for further work.

Keywords: Monetary policy; Collateral framework; Climate change; Risk and uncertainty; Eurosystem. (search for similar items in EconPapers)
JEL-codes: D81 E52 E58 G32 Q51 Q54 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2020
New Economics Papers: this item is included in nep-env, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://publications.banque-france.fr/sites/defaul ... cuments/wp-790_0.pdf

Related works:
Working Paper: Climate-related risks and central banks’ collateral policy: a methodological experiment (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:790

Access Statistics for this paper

More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().