Realising Central Banks’ Climate Ambitions Through Financial Stability Mandates

Abstract

This paper discusses how financial stability governance has evolved and how central banks and financial regulators are coping with the threats posed by climate uncertainty, providing an overview of G20 countries’ green central banking experiences in the past 20 years. The analysis shows that most central banks realise their climate ambitions through financial stability mandates, leaving the monetary stability mandate unaffected. Considering the debate on market neutrality, the concerns on the risk of overstretching the central banks’ mandate, violation of Tinbergen’s principle and threats posed to central banks’ independence, the provided evidence reveals a mismatch between the observed policy practice and its theoretical underpinnings. Drawing on these findings, we argue that effective green central banking governance should be based on a synthesis between monetary and macroprudential policymaking.

Financial stability and sustainable development

“…Therefore, we predict that a stable financial system would support the realization of sustainable development goals. Furthermore, it is possible that the central bank's involvement in financial stability governance may provide an opportunity for the central bank to pressure regulated financial institutions to support the SDGs by decarbonizing their balance sheet and allocating tailored credit to specific SDG projects or activities (Battiston et al, 2021; D'Orazio & Popoyan, 2022; Fabris, 2020). This further suggests that financial stability can have a positive impact on sustainable development through regulatory pressure or action.…”

Financial Stability and Sustainable Development

“…Therefore, we predict that a stable financial system would support the realization of sustainable development goals. Furthermore, it is possible that the central bank's involvement in financial stability governance may provide an opportunity for the central bank to pressure regulated financial institutions to support the SDGs by decarbonizing their balance sheet and allocating tailored credit to specific SDG projects or activities (Fabris, 2020;Battiston et al, 2021;D'Orazio and Popoyan, 2022). This further suggests that financial stability can have a positive impact on sustainable development through regulatory pressure or action.…”

Monetary Policy and Income Distribution in the Covid-19 Pandemic Crisis. A European Perspective

“…They must indeed integrate the distributional impacts of their choices as well as their effects on climate changes at global level. Both issues have an influence on financial (in)stability, too, which has become a matter of concern by major central banks in the aftermath of the global financial crisis (see, for instance, D'Orazio and Popoyan, 2019; Bolton et al, 2020;D'Orazio, 2021;Schoenmaker, 2021 andD'Orazio andPopoyan, 2022).…”