‘Green swan’ climate event could cause next financial crisis-BIS

The BIS urges greater global mobilization of government resources to contain financial fallout from climate change.

Black Swan
So-called 'black swan' theory was developed by author Nassim Nicholas Taleb to describe rare events that have an outsised, often negative impact and now the Bank of International Settlement is warning of a 'green swan' event linked to climate change that could have wide reaching consequences for the global financial system [File: Sergio Perez/Reuters]

Utter the term “black swan” in financial circles and it will conjure images of an economic catastrophe triggered by a rare event people should have seen coming, if only they had opened their eyes.

On Monday, the Bank for International Settlements (BIS) published its riff on that theory.

In a paper titled “The green swan” the Basel-based institution warns climate change could unleash “potentially extremely financially disruptive events,” that could trigger the next global financial crisis. To contain the fallout, the BIS is urging global coordination among central banks, regulators and supervisors including jettisoning backward-looking risk assessments models that are not fit for gauging the far-reaching consequences of climate disruptions. 

The number of extreme weather events has quadrupled over the last 40 years. Only 44 percent of the financial losses caused by those types of events are now covered in the United States. In Asia, it’s just 8 percent and in Africa, only 3 percent.

“I think we might be on the brink of observing something that might be behind the next systemic financial crisis,” Luiz Awazu Pereira Da Silva, one of the paper’s main authors, told reporters.

If the more extreme climate scenarios start to play out, central banks, having played a vital role in the financial crisis, might be asked to step in as the “climate rescuer of last resort”.

“There is no silver bullet,” Pereira Da Silva cautioned. “Central banks are not going to save the world again.”

In a forward to the book, the head of France‘s national central bank, Francois Villeroy de Galhau, added that climate change needed to be part of all economic and forecasting models.

The book said current regulation based on capital requirements for banks will not be able to mitigate the catastrophic effect of climate change on the financial system.

New policy mixes are needed instead, involving governments, central banks and prudential or capital requirements. But that would require unprecedented international coordination at a time when the global framework for finance is “seriously compromised”, the book said.

Regulators monitor risks by using historical data and assumptions that are now “largely irrelevant to assess future climate-related risks”.

Assessing the risks, therefore, requires a reset of the regulatory approach, which has already begun in the financial community with the development of forward-looking, scenario-based risk-management methodologies, the book said.

“Climate change poses unprecedented challenges to human societies, and our community of central banks and supervisors cannot consider itself immune to the risks,” Villeroy de Galhau said.

Source: Al Jazeera, News Agencies