Central banks play a crucial role in managing climate-transition risks, but they primarily use microprudential tools, such as reviewing banks’ risk models and risk-management processes. While helpful, this approach has failed to prevent systemic climate-related imbalances – similar to the overlooked risks before the 2007-2008 financial crisis.
A macroprudential path to stability
The Bruegel Policy Brief advocates for a macroprudential approach, treating climate as an endogenous transition rather than an exogenous risk. Central banks should aim to minimise financial instability during the transition, recognising that a steady path to net-zero ensures the most stability. Existing proposals, like systemic risk buffers for climate-related concentration risks, may not achieve this goal. The policy brief suggests a "guided transition" for banks, requiring the financial sector to reduce financed emissions by four percentage points annually from 2025 to 2050. This strategy would ensure net-zero alignment with minimal financial instability.
Read the Bruegel article by Prof. Dirk Schoenmaker and Hesse McKechnie, Platform advisory board member and fellow, and director of sustainable finance with Deloitte. The Policy Brief builds on Schoenmaker’s academic work of climate transitions and McKechnie’s hands-on observations working with financial services institutions across Europe on sustainability strategy, transition and reporting questions.
About Bruegel
Bruegel aims to improve economic policy through open, fact-based research, analysis and debate. Committed to impartiality and excellence, it engages EU governments, international corporations, and institutions. Through publications, events, and media, Bruegel fosters policy discussions and impactful analysis. Its research follows a structured three-year cycle, with annual programmes guided by members and approved by the board.