Call for “one-for-one” prudential capital requirements on fossil fuel financing to prevent an economic crisis

• Banking and insurance regulators have significantly underestimated the risk weighting for fossil fuel investments, with failure of regulation akin to the situation before the 2008 global financial crisis, leading economists warn.

• €3.26 trillion has been invested in fossil fuels by world’s 60 biggest banks since COP21 in Paris in 2015.

• Self-regulation by banks and insurers labelled “a failure to regulate of historic proportions.”
• Open letter released today calls for one-for-one capital requirements as part of prudential regulation: for each euro that finances new fossil fuel projects, banks and insurers should hold a euro to guard against future risks.

Ahead of COP26, Adam Tooze, Ann Pettifor and Stephany Griffith-Jones are among prominent academics and civil society figures from around the world calling on global leaders to impose more stringent capital requirements on banks and insurers that finance new fossil fuel projects. Their intervention, in an open letter published today, follows a similar call from Chris Hohn, founder of The Children’s Investment Fund, a hedge fund with approximately $30 billion in managed assets.

This comes at a crucial moment. The European Commission is due to submit a legislative proposal  on capital requirement regulations to the European parliament and the Council of Europe today. The proposal aims to bring the EU banking sector into alignment with the international Basel III regulatory framework. But accounting for climate risks in prudential requirements is currently not part of the proposal.

With global leaders expected to double down on emissions reductions commitments to limit warming to 1.5°C by 2030 at COP26 in Glasgow, the open letter calls on politicians including Joe Biden, Boris Johnson, Ursula von der Leyen, COP President Alok Sharma, and G20 President Mario Draghi, to push for financing of new fossil fuel projects to be given the highest possible risk-weighting for capital requirements. Dubbed the “one-for-one rule”, this would mean that – as is the standard for the riskiest asset classes in prudential regulation – for every euro invested in fossil fuel projects, financial institutions like banks and insurers would need to hold the equivalent to absorb future losses.

The inadequate current prudential risk-weighting of fossil fuels in effect subsidises the banking and insurance sectors to finance projects that risk the stability of the global economy, distorting markets and  making fossil fuels artificially cheap. Slack regulation compounds the harm done by €1.31 million a minute in direct subsidies and tax breaks provided by governments to the fossil fuel industry, a transfer detailed by the IMF in a recent report.

The signatories to the open letter say that, “with the transition to a low-carbon economy, fossil fuel assets of banks and insurers will rapidly diminish in value or become entirely worthless. This will lead to massive losses for financial institutions, which could result in them requiring bailouts, where the public is the one to pay.” They go on to say that, “[T]he capital levels that banks and insurers must maintain to cover potential future losses do not match the risks of these exposures.”

According to the latest data from the Rainforest Action Network, since 2016 the 16 biggest European banks have collectively provided over €475 billion to the fossil fuel industry. Though comparable figures are not available for the insurance industry, it is estimated that EU insurers collectively have investments of over €150 billion in oil, gas, and coal.

Benoît Lallemand, Secretary General of pan-European group Finance Watch, which coordinated the letter, said:

“The global financial crisis of 2008 – and its disastrous political aftermath – have shown what happens when systemic risks in the financial system go unaddressed. Without action we face an even bigger economic crisis. This will be a failure to regulate of historic proportions, with the burden falling on taxpayers around the world when banks and insurers come begging for government bailouts. Our message to banks and insurance firms is this: If you want to finance new fossil fuel projects, do it at your own risk.”

Stephany J. Griffith-Jones, Fellow at the Institute of Development Studies at the University of Sussex and Financial Markets Director at the Initiative for Policy Dialogue at Columbia University, said:

“By continuing to finance fossil fuel extraction, banks and insurers are contributing to taking us past the point of no return, both from an environmental perspective and generating high future financial stability risks when these assets become stranded. Regulators like the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors need to take action to  help prevent these twin disasters. Urgent significant regulatory measures to discourage financing of  fossil fuel extraction are needed to ensure economic and environmental stability. The time for regulators to act is now.”

The open letter marks the launch of the One-for-One campaign. Spearheaded by The Sunrise Project and Finance Watch, and joined by a coalition of NGOs from around the world, the campaign is calling for the implementation of prudential regulation for fossil fuel financing commensurate with the risks involved.

-ENDS-

Notes to editors

About Finance Watch

Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.

Finance Watch have published two reports on prudential regulation for the banking and insurance sectors: Breaking the climate-finance doom-loop and Insuring the uninsurable.

About Benoît Lallemand, Secretary General of pan-European group Finance Watch

Secretary General of Finance Watch since January 2017, Benoît Lallemand served previously as senior policy analyst mainly covering MiFID 2, as well as senior advisor to Better Markets on EU affairs and head of strategic development and operations. He started the Citizens’ Dashboard of Finance, a platform allowing a broad range of stakeholders, including pioneers in sustainable businesses and financial services, academics and civil society organizations, to engage in a global campaign to change finance. Before joining Finance Watch upon its creation in 2011, Benoît Lallemand spent more than 10 years in the financial sector in clearing and settlement, where he held senior positions in asset-servicing departments, focusing on fixed income and structured products primary markets and regulatory reporting. He managed several business steering committees and strategic projects.

About Professor Stephany Griffith-Jones

Professor Stephany Griffith-Jones is a Research Associate at the  Overseas Development Institute, Emeritus Fellow at the Institute of Development Studies at the University of Sussex and Financial Markets Director at the Initiative for Policy Dialogue at Columbia University. She is an economist specialising in international finance and development, with emphasis on reform of the international financial system, specifically in relation to financial regulation, global governance and international capital flows.

She has held the position of deputy director of International Finance at the Commonwealth Secretariat and has worked at the United Nations Department of Economic and Social Affairs and in the United Nations Economic Commission for Latin America and the Caribbean. She has published over 20 books and written many scholarly and journalistic articles, including the Financial Times, The Guardian, Project Syndicate and The Conversation.