Finance, climate-change and radical uncertainty: Towards a precautionary approach to financial policy

Climate-related financial risks (CRFR) are now recognised by central banks and supervisors as material to their financial stability mandates. But while CRFR are considered to have some unique characteristics, the emerging policy framework for dealing with them has largely focused on market-based solutions that seek to reduce perceived information gaps that prevent the accurate pricing of CRFR. These include disclosure, transparency, scenario analysis and stress testing. We argue this approach will be limited in impact because CRFR are characterised by radical uncertainty and hence ‘efficient’ price discovery is not possible. In addition, this approach tends to bias financial policy towards concern around avoiding short-term market disruption at the expense of longer-term, potentially catastrophic and irreversible climate risks. Instead, an alternative ‘precautionary’ financial policy approach is proposed that offers an intellectual framework for legitimizing more ambitious financial policy interventions in the present to better deal with these long-term risks. This framework draws on two existing concepts — the ‘precautionary principle’ and modern macroprudential policy — and justifies the full integration of CRFR into financial policy, including prudential, macroprudential and monetary policy frameworks

Credit policy and the ‘debt shift’ in advanced economies

The decline in the share of bank credit to non-financial firms since the 1990s, relative to credit for real estate and financial asset markets, has raised concerns over economic growth and financial stability and sparked renewed interest in credit policies, instruments and institutions. We examine their theoretical case and post-war use, and trace their demise during the wider market-oriented policy reconfiguration from the 1980s. Notably, this included home ownership polices favouring mortgage markets. We then examine the empirical relationship between credit policy and credit allocation in the 1973–2005 period for 17 advanced economies. Taking account of co-integration, we present evidence that the decline of credit policies is significantly associated with a lower share of lending to non-financial firms. It may be worth revisiting the potential of credit policies to support adequate financing for goals such as innovation, industrial development and the transition to a low-carbon economy