Wednesday 10 November 2021

RBNZ and climate risk

If climate change poses sufficient risk to the financial system to justify central banks having broad remit over anything in banking and insurance that relates to it, then you might as well conclude that the Reserve Bank should just get to run everything. 

Pandemics, worse pandemics, war between China and Taiwan - there's a lot of risks out there, and those risks could affect asset markets and companies' financial positions. 

Maybe banks should be required to disclose their exposure to things that could go south if there's a trade war with China, because of the risks there, and the Reserve Bank should start producing reports on global security and take over national defence and signals intelligence. 

It's all crazy. But there is no risk to the financial system from climate change that's likely to exceed the risks to the financial system from those other risks. You need to show that there is a real and substantial risk to financial stability. Not just that the problem is big and important in its own right. 

My colleague Matt Burgess released a report yesterday showing just how long a bow the Reserve Bank is drawing. They have not provided any evidence of risks that would warrant their regulatory expeditions into climate change. 

Over at Newsroom, I worry that the Bank is almost begging for an incoming government to sack the Governor, because of the overreach into areas of Parliamentary prerogative, and that it's not always easy to tell if those kinds of moves wind up restoring or ending Bank independence. 

Jenny Ruth, over at Business Desk, reports on the Reserve Bank's moves to hide its lack of evidence in support of its Governor's sweeping claims for regulatory mandate around climate risks. 

The Reserve Bank tried to bury its own research that found climate change is not a threat to financial stability. 

That research contradicts many statements by Reserve Bank of New Zealand (RBNZ) governor Adrian Orr that climate change is an existential threat to the economy and that the central bank needs to be at the centre of New Zealand's climate change response. 

For example, Orr said in a speech last month that "the financial stability risks associated with climate change are significant, necessitating an urgent and collaborative response". The RBNZ has a section of its website dedicated to climate change on which it says: "Climate change poses a direct challenge to financial stability." 

In this, Orr is not alone. Central banks around the world are expressing concerns about the impact of climate change on financial stability, and courting controversy in doing so. 

The 2018 paper said: "Our preliminary assessment is that the risks associated with climate change should not, in and of themselves, create a significant issue for the soundness and efficiency of the financial system." 

My colleague, Bryce Wilkinson, had been OIAing to get that material. RBNZ buried the paper they'd done showing there was no risk. Ian Harrison dug it up later. Sometimes, you have to know the exact name of the thing that you don't know exists in order to summon it up by OIA, when the officials really want to hide the cheese.

Ruth concludes:

Orr's claims to the contrary are an overreaction and "motivated more by attention-seeking than the science and sound economics", said Harrison. 

The RBNZ "deliberately hid their report for months and misled people seeking it under the OIA to promote its new, more catastrophist narrative", he claims. 

Looking at the timeline from the first request, and the long delay in publishing the 2018 paper, two years after it was written and only under threat of a complaint to the ombudsman, and its relatively obscure positioning on RBNZ's website, it's difficult to reach any other conclusion.

Saying that the Reserve Bank shouldn't have jurisdiction over foreign policy, or over trade agreements with Taiwan, or mandate to require Banks to disclose every possible risk on their balance sheets around war between China and Taiwan isn't saying that war between China and Taiwan would be a good thing, or that we shouldn't care about it.  

It's saying that some things are so tenuously linked to financial stability that it's incredible overreach for a central bank to try to take a leading role in it, even if it is really important in the bigger picture.

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