The greenness of central banking: Rethinking the macroprudential framework

Abstract

Climate change has the potential to affect all areas of the economy. It’s a threat to the stability of the financial system that could cause more damage than COVID-19 and the 2009 financial crisis combined.

There is broad consensus that financial streams need to be redirected into sustainable activities to create an economy that preserves rather than threatens the basis of our existence. So far, most of the debate and regulatory initiatives to green the financial system have focused on commercial banks.

But recently there has been a growing recognition of the role central banks have to play in supporting the development of green finance and addressing risks associated with climate change.

Traditionally, central banks haven’t explicitly factored environmental and social objectives into their decisions or evaluated their impacts beyond the narrow monetary domain. But environmentally unsustainable economic activity has become a concern for central bankers and financial regulators, as climate risk is also a source of financial risk. Where the economy as a whole is endangered, financial stability is affected. This relates directly to the role of central banks as guardians of financial, monetary and macroeconomic stability.

Keywords: Climate Change, Central Banking, Monetary Policy, Financial Stability

JEL Classification: E40, E58,