Wednesday, April 24, 2024

Dr Eric Crampton: Still no prudential regulation case around climate change

The Reserve Bank of New Zealand desperately wants to find reasons to have workstreams in climate change.

It makes little sense.

They've run another stress test on the banks looking to see if they could find a prudential regulation case.

They couldn't.

They found no systemic risk from a harsh scenario, just losses absorbed by shareholders of banks that don't respond adequately. And while that might make the banks less resilient against further shocks, that ought to just mean that the RBNZ's prudential side makes sure that bank capitalisation remains high enough.

Here's their report on it.

They conclude:

The Climate Stress Test, and preceding Risk Assessments, have shone a light on the potential effects climate-related risks can have on our large banks’ balance sheets. Climate-related risks, if not managed, could significantly reduce bank dividends, profitability and raise credit risk-weighted assets over the medium to long-term which would lessen the resilience of the system to other shocks.

I come to a different conclusion.

The Reserve Bank's prudential and monetary roles should be split across two separate agencies. A monetary authority with independence in the use of monetary policy to keep inflation within tight bounds. And a prudential side restricted to dealing with actual prudential risk.

Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE

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