BIS: "'Green Swan' Climate Change Could Trigger Financial Crisis... Central Banks Cannot Handle It Alone"

Source: BIS Report

[Asia Economy Reporter Jeong Hyunjin] It has been pointed out that if financial authorities do not respond to the rapidly progressing climate change, a structural financial crisis could occur. This phenomenon, where the financial system is severely shocked by climate change like a 'Black Swan'?an event with an extremely low probability but enormous impact?is described as a 'Green Swan.'

On the 20th (local time), the Bank for International Settlements (BIS) released an analysis on financial stability in the era of climate change through a report titled "Green Swan."

The report stated, "The Green Swan or environmental Black Swan represents various forms of the typical Black Swan," and pointed out that the conventional methods of risk management, such as statistical estimation or assumptions based on normal distribution, are irrelevant to assessing risks arising from future climate change. It also noted that unlike Black Swans, the Green Swan is certain to cause damage due to climate change at some point, and more complex and unpredictable cascading phenomena may occur.

BIS emphasized that as climate change worsens, central banks have no way to resolve it on their own, and current regulations will struggle to mitigate the impact of climate change on the financial system. It stressed that central banks must undergo a paradigm shift and respond proactively through broad and collective changes to fulfill their mandates of financial and price stability. In particular, it added that actions are needed among various stakeholders, including governments, the private sector, civil society, and the international community, and that central banks will take on an additional coordinating role.

Meanwhile, this report was released amid the 50th Annual Meeting of the World Economic Forum (WEF, Davos Forum) held from the 21st to the 24th in Davos, Switzerland, where climate change is a key topic of discussion. The WEF will be attended by 16-year-old Swedish environmental activist Greta Thunberg, Christine Lagarde, President of the European Central Bank (ECB), Ursula von der Leyen, President of the European Union (EU) Commission, among others, to discuss climate change. Former U.S. President Donald Trump, who has denied climate change, is also expected to attend, drawing attention to whether heated debates will arise during the discussions.