Bank For International Settlements: Climate Risk "Uninsurable And Unhedgeable" w/o Systemic Change

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Both types of risk “are characterized by deep uncertainty and nonlinearity,” BIS said. Worse, they will interact with each other, resulting in feedback loops that could deepen financial stress. The destruction of coastal real estate could trigger bank failures or the collapse of insurance markets as losses pile up, for example. The ripple effects are difficult to predict, and the 2008-2009 financial crisis is a reminder that the financial system can seize up in an instant. However, green swan events are different from a typical “black swan” event in that while the details or timing of the disaster are unpredictable, there is nevertheless a high degree of certainty that climate catastrophes will indeed happen. And they are “even more serious than most systemic financial crises: they could pose an existential threat to humanity,” the BIS report warned.

Central banks have dangerously few tools at their disposal to respond to climate-related financial crises. Ahead of time, central banks can do stress tests, work with financial markets on disclosure, study regulation, and recommend certain policies. They can also exclude debt of carbon-intensive industries when they purchase bonds, for instance, or require lenders to hold more capital reserves. But “climate-related risks will remain largely uninsurable or unhedgeable as long as system-wide action is not undertaken,” the BIS said.

Even as they remain ill-equipped to head off disaster, central banks “may inevitably be led into uncharted waters” as the climate crisis unfolds, forcing them “to intervene as ‘climate rescuers of last resort’ and buy large sets of devalued assets, to save the financial system once more,” the report warned.

However, central banks cannot buy up entire swathes of coastline that go under water, or rescue collapsed industries left behind in the transition. Ultimately, central banks cannot bail out the carbon-loaded atmosphere as if it were a tranche of toxic mortgage assets that simply need to be removed from the balance sheet. “The biophysical foundations of such a crisis and its potentially irreversible impacts would quickly show the limits of this ‘wait and see’ strategy,” the report warned.

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https://www.desmogblog.com/2020/01/31/green-swan-central-banks-financial-crisis-climate-change