Climate change likely to destabilize the financial system (BIS)

Climate change could trigger events that could destabilize the financial system, economists at the Bank for International Settlements and the Banque de France said on Monday in a book of works examining measures that central banks can take.

Between economic damage and uninsured losses, climate risks are likely to turn into “green swans”, he warned, referring to the concept of “black swans” developed in 2007 by the philosopher and former broker Nassim Nicholas Taleb.

A “black swan” in the world of finance is a rare event, very improbable, unpredictable, and with devastating consequences.

“The increase in the frequency and intensity of extreme weather events could lead to non-linear and irreversible financial losses”, underlined François Villeroy de Galhau, the governor of the Banque de France, in preface to this collection of works .

Central banks, one of the main missions of which is to guarantee the stability of the financial system, have a key role to play, in particular by developing analytical tools to take account of climate risks or by investing part of the monetary reserves in green bonds.

But they have no “miracle cure,” insisted Luiz Awazu Pereira da Silva, deputy director general of the Bank for International Settlements, an institution considered the central bank of central banks, and a member of the task force.

Central banks alone cannot mitigate risks, the authors stressed, calling for coordinated efforts with governments, the private sector and civil society.

To contribute to the growth of green bonds, the BIS created a fund in September which should allow the central banks to use them more frequently. According to a study published shortly before in its quarterly report, the yield on green bonds is on the whole comparable to that of other bonds, but the narrowness of the market and the lack of liquidity still hamper their use by central banks.

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