Climate Change and the Role of Regulatory Capital: A Stylized Framework for Policy Assessment

Michael Holscher, David Ignell, Morgan Lewis and Kevin Stiroh ()

No 2022-068, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper presents a stylized framework to assess conceptually how the financial risks of climate change could interact with a regulatory capital regime. We summarize core features of a capital regime such as expected and unexpected losses, regulatory ratios and risk-weighted assets, and minimum requirements and buffers, and then consider where climate-related risk drivers may be relevant. We show that when considering policy implications, it is critically important to be precise about how climate change may impact the loss-generating process for banks and to be clear about the specific policy objective. While climate change could potentially impact the regulatory capital regime in several ways, an internally coherent approach requires a strong link between specific assumptions and beliefs about how these financial risks may manifest as bank losses and what objectives regulators are pursuing. We conclude by identifying several potential research opportunities to better understand these complex issues and inform policy development.

Keywords: Climate change; Regulatory capital (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2022-10-18
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ene, nep-env, nep-reg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-68

DOI: 10.17016/FEDS.2022.068

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