The Reserve Bank may have to take over stranded coal mines and coal-fired power stations to fulfil its mandate for financial stability, according to one of the world’s most powerful financial institutions, the Bank for International Settlements.
- Climate change has the potential to spark the next major global financial crisis according to the BIS
- Central banks’ mandates for maintaining financial stability meant they are likely to become “climate rescuers’ of last resort”
- The BIS argues central banks like the RBA may have to bail out the fossil fuel industry
The BIS, which is owned by the world’s 60 largest central banks (including the RBA) and is commonly referred to as the “central banks’ central bank”, said climate change may well spark the next great global financial crisis and regulators needed to address the potential risks urgently.
In a major study released from its Geneva headquarters, BIS general manager Agustín Carstens argued the financial stability mandates at the heart of central bank operations around the world meant they needed to be involved in mitigating the financial risks posed by climate change.
“In the worst case scenario, central banks may have to confront a situation where they are called upon by their local constituencies to intervene as climate rescuers of last resort,” the BIS report warned.
“For example, a new financial crisis caused by green swan events severely affecting the financial health of the banking and insurance sectors could force central banks to intervene and buy a large set of carbon-intensive assets and/or assets stricken by physical impacts.”
The BIS uses the “green swan” concept as climate-change alternative to the term “black swan”, used to to describe unexpected and extreme occurrences that have major effects, which could be anything from terrorist attacks to disruptive technologies or a natural disaster.
The next global financial crisis?
The BIS Green Swan report argued current risk assessment and climate change models cannot anticipate accurately enough the form that climate-related risks will take and the “potentially extremely financially disruptive events that could be behind the next systemic financial crisis.”
The value of the world’s stranded fossil fuel reserves is massive but difficult to pin down according to the report, ranging from Carbon Tracker’s $US1.6 trillion ($2.3 trillion) estimate to the International Renewable Energy Agency’s 2017 calculation of $US18 trillion ($26 trillion).
“Under an abrupt transition scenario (e.g. with significant stranded assets), financial assets could be subject to a change in investors’ perception of profitability,” the BIS warned.
“This loss in market value can potentially lead to fire sales, which could trigger a financial crisis.”
Due to investments in and loans to fossil fuel producers, financial risks would spread throughout global markets leading to a mass of defaults and tightening banks’ liquidity and ability to lend, in much the same way as the contagion caused by the collapse of the US subprime mortgage sector spread rapidly worldwide during the 2008 financial crisis.
While the BIS found there is much central banks can do, it noted they cannot act in isolation.
It said central banks should more involved coordinating climate change actions among major players — governments, the private sector and the international community.
The report found key areas for central bank involvement included:
- Climate mitigation policies such as carbon pricing;
- Integrating sustainability into financial practices and accounting frameworks;
- Developing new financial mechanisms at the international level.
“Green swan events may force central banks to intervene as ‘climate rescuers of last resort’ and buy large sets of devalued assets, to save the financial system once more,” it warned.
“However, the biophysical foundations of such a crisis and its potentially irreversible impacts would quickly show the limits of this ‘wait and see’ strategy.
“On the other hand, central banks cannot — and should not — simply replace governments and private actors to make up for their insufficient action, despite growing social pressures to do so.”