Capital Rules Can Cushion Banks’ US$1.35 trillion Fossil Fuel Exposure

Prudential regulators should increase the risk weighting applied to major banks’ fossil fuel assets to protect against future financial losses likely to be incurred by their combined US$1.35 trillion credit exposure, a new report says. According to NGO Finance Watch, applying a 150% risk weight – the risk weight applicable for higher risk assets under the Basel framework – to banks’ existing fossil fuel assets globally as a Pillar 1 capital measure would require additional capital of between US$157.0-US$210.2 billion for the world biggest 60 banks, equivalent on average to three to five months of their 2021 net income. Bank supervisors have recognised the increasing financial stability risks resulting from climate change but have stopped short of using capital rules. Finance Watch said this approach would provide a cushion for the financial system without reducing lending capacity. “As fossil fuels are the main contributors to accelerating climate change and many of the assets associated with the fossil fuel industry will need to be abandoned before the end of their economic life to achieve the transition to a carbon-neutral economy, banks’ exposures to fossil fuel assets should be a matter of priority for prudential regulation,” it said.



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