Bank of England to crack down on banks who lack climate risk capital

The Bank of England (BofE) has revealed it intends to crack down on banks and insurers who fail to hold enough capital to cover risks from climate change from next year.

According to Reuters, the BofE already holds the powers to force banks and insurers to top up their general capital buffers if climate risks are not sufficiently covered. The bank will also study whether bespoke company and sector-wide climate buffers are also required.

The bank previously said two years ago that banks and insurers should set out by the end of this year how they intend to manage risks from climate change and disclose them. In a recent report, while the BofE claimed some companies have made ‘tangible progress’ in meeting these goals, some are materially more advanced than others. Therefore, it intends to shift how it supervises and enforces these requirements.

The BofE said, “This work will help determine whether changes to the design, use or calibration of the regulatory capital framework may also be needed to ensure resilience against these risks. We will provide an update on our approach in 2022 following a call for further research and a conference on climate change and capital requirements.

As we move into 2022, the Prudential Regulatory Authority will actively supervise to ensure firms meet expectations, with firms needing to demonstrate a good understanding and management of climate-related financial risks on an ongoing basis

“In the report we highlight that we will consider the use of our full supervisory and regulatory toolkit to provide the necessary assurance or remediation where appropriate.”

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