Climate risk-weighting: the devil and the deep blue sea

Should capital charges be calibrated to climate risk? European banks test the waters

Risk 1219 RWA Stephen Lee NB illustration
Stephen Lee,

Climate change is real. So is climate-related financial risk. Yet prevailing prudential standards fail to capture this, meaning lenders needn’t capitalise against potential losses either from physical risks – such as extreme weather events – or transition risks, which erode the value of carbon-hungry assets as green technologies supplant them.

“We know there are risks linked to climate change. We know those risks haven’t been properly assessed in the past. We know they’re still not properly

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