World’s banks told to apply capital rules to climate risks where possible

LONDON, Dec 8 (Reuters) – Global regulators set out their first guidance on Thursday to show banks how to apply existing capital rules to cover climate change risks that could lead to losses.

Climate change, such as extreme weather events, will affect the value of a bank’s assets, and uncertainties from the transition to a low carbon economy will hit some banking customers.

The Basel Committee of regulators from the world’s main financial centres said international banks should consider how to incorporate climate-related financial risks into their interpretation and application of the existing capital rules.

It set out a suite of frequently asked questions to help banks grappling with how to predict potential losses years into the future using patchy data.

“Where appropriate, the responses explicitly acknowledge data limitations and recognise that practices will evolve iteratively over time, and therefore allow for flexibility while promoting a globally consistent implementation of the Basel Framework,” the committee said in a statement.

The guidance piles pressure on banks to become more granular in their approach to climate change while Basel considers whether bespoke capital rules are needed.

Central banks like the European Central Bank, Bank of England and Bank of France have already begun climate-related stress-testing of lenders, although the outcome of these exercises had no direct impact on capital requirements for now. (Reporting by Huw Jones; Editing by Hugh Lawson)