Central banks could be forced to take drastic action on “green swan” climate events in order to prevent the next financial crisis, according to the Bank for International Settlements (BIS).
“Green swan” events are “potentially extremely financially disruptive events” caused by runaway climate change. They’re based on so-called “black swan” events but are more predictable, more complex, and more catastrophic. And they could force central banks to take serious action on a massive scale.
“In the worst case scenario, central banks may have to confront a situation where they are called upon by their local constituencies to intervene as climate rescuers of last resort,” the report reads.
“For example, a new financial crisis caused by green swan events severely affecting the financial health of the banking and insurance sectors could force central banks to intervene and buy a large set of carbon-intensive assets and/or assets stricken by physical impacts.”
The report warns that green swan events “could be behind the next systemic financial crisis”. But the report also cautions central banks against giving in to public pressure to substitute their programs for a government intervention, instead suggesting they take a leading role in developing and spearheading policy responses.
“Without aiming to replace policymakers and other institutions, central banks must also be more proactive in calling for broader and coordinated change, in order to continue fulfilling their own mandates of financial and price stability over longer time horizons than those traditionally considered,” the report reads.
“The risks posed by climate change offer central banks a special perspective that private players and policymakers cannot necessarily adopt given their respective interests and time horizons.”
But given the lack of government action on climate change, it may indeed fall to central banks to step up. And if that happens, the monetary policy response would dwarf that seen during the GFC, when many central banks were forced to roll out quantitative easing programs.
“The stark reality is that we are all losing the fight against climate change,” wrote François Villeroy de Galhau, governor of the Bank of France and a member of the BIS board.
“If central banks are to preserve financial and price stability in the age of climate change, it is in their interest to help mobilise all the forces needed to win this battle.”