Around the world, central banks are scrambling to tackle the economic and financial damage wrought by the coronavirus pandemic, announcing interest rate cuts and asset purchase programs to shore up economies and a range of regulatory and supervisory measures to maintain financial stability and ensure liquidity, according to Rob Bailey, Director of Climate Resilience at Marsh & McLennan Advantage Insights.
COVID-19 clearly illustrates how destabilizing risks from outside the financial system can be when they cascade through markets and economies. It also underlines the importance of preparedness among central banks. Indeed, until the current crisis escalated, central banks had been pondering the question of how they should prepare for exogenous risks to financial stability posed not by pandemics or terrorism, but by climate change.
Membership of the Network for Greening the Financial System — a club of central banks and supervisors focused on integrating climate risks into regulatory frameworks launched in December 2017 — had grown to 59 authorities by the start of March 2020. The chairman of the Federal Reserve has indicated that the Fed is likely to join, while active members such as the Bank of England and the Banque de France have recently announced climate stress tests of their financial sectors. Earlier this year, the Bank for International Settlements (BIS) — often referred to as the “central bank for central banks” — published a report on the risk of so-called “green swan” climate events, arguing that these could cause the next systemic financial crisis.