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Understanding the Climate Loan-To-Value: – a macroprudential tool against the build-up of climate risk

Understanding Finance / Cartoons & Explainers

Climate risk is growing to disruptive levels throughout the financial system and the guardians of financial stability urgently need to adapt their tools to regain control. Finance Watch’s new report calls a new prudential tool to address the build-up of systemic climate risk.

The LTV threshold we propose would be set in proportion to the amount of fossil fuels to which a bank is exposed that can be safely exploited within the carbon budget for a given temperature increase:

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