A macroprudential approach to compound climate risks
Climate-related shocks will not occur in isolation. Instead, they will unfold within an existing macro-financial environment, where their interaction may lead to compound losses. In such an environment, macroprudential buffers earmarked for specific risks have limitations, as they might not account for important correlations between climate-related shocks and other sources of financial vulnerability, nor for the extent to which climate-related shocks might compound existing challenges in the real economy and financial sector. In light of such complex challenges, this report from the Centre for Economic Transformation Expertise (CETEx) investigates how a holistic approach can enhance the financial system’s ability to absorb compound shocks. The authors make the case for a consolidated macroprudential buffer framework to ensure the financial system’s resilience under increasingly complex and uncertain conditions.