As climate change poses new financial risks to a central bank’s monetary policy operations, the bank decides to adapt operations with NGFS guidelines. Because the central bank does not include climate change in supervision practices, the bank consults subject matter experts (SMEs) to develop a proposal for central bank action on climate change. After completing the risk assessment, SMEs recommend the bank incorporate microprudential and macroprudential measures to embed climate change into supervision practices.
Which action are SMEs likely to recommend?
- Conduct climate stress tests with standardized policy scenarios and feedback loops as a microproduential measure.
- Increase internal resources and establish an external review process for climate risk integration as a macroprudential measure.
- Adhere to disclosure best practice when integrating climate risk by following TCFD disclosure recommendations as a microprudential measure.
- Implement the widely adopted macroprudential measure of a procyclical capital buffer to increase equity capital during periods of carbon-intensive credit.