Practical but off-key, Australia’s banking regulator has made clear to the industry that stranding their most offensive carbon-polluting clients by closing down access to the capital market for these industries would be against the public interest and lousy for banking industry self-interest.
“Providing finance to assist customers to adapt to climate change is an important function of the financial system,” APRA said in a consultation on its draft Prudential Practice Guide on Climate Change Financial Risks.
APRA’s labelling this undertaking as a consultation is, not for the first time, a bit of a joke. The most material consultation was worked through months and weeks ago.
All four of Australia’s major banks, plus Macquarie Group, have been deeply engaged with the prudential regulator and nothing in this document will be new to them.
When the big businesses loathed by the Greens and The Australia Institute fail to adequately address their climate damaging behaviour, setting off the banks’ risk assessment alarms, APRA sets out three approaches for banks to take instead than jumping to basically force them into liquidation.
“Where the institution considers this engagement will not result in the climate risks being adequately addressed, an institution may need to consider mitigation options such as:
• Reflecting the cost of the additional risk through risk-based pricing measures;• Applying limits on its exposure to such an entity or sector; or• Where the risks cannot be adequately addressed through other measures,• considering the institution’s ability to continue the relationship,” APRA said.
The 18-page draft Prudential Practice Guide is long on addressing themes and reiterating the urgency of sophisticated responses around the finance industry, while short on mandating much beyond thinking about climate change, embedding the understandings into business practice, and documenting and reporting and scrutineering it all.
The section titled ‘Scenario analysis’ is one for the cynics.
APRA said it expects the use of scenario analysis and stress testing for climate risks to be proportionate to an institution’s size, business mix and complexity.
"In general, larger and more complex institutions, with a wide range of business, would be expected to have more advanced analytical capability," APRA said … but don’t assume.
A Bloomberg webinar on Tuesday on this topic uncovered the admissions (by all four big banks, basically) that they are collectively in a tizz, with urgent retraining on a top-down model only one unsettling indicator of a sector preparimg late for the upheavals that will be concentrated into decades, maybe years and taking into account the current political hubbub, even very, very soon.
At CBA the top executives have only just been trained and the next few tiers down have this in their diaries.
ANZ, meanwhile, has hired 14 well-paid, well-seasoned executives and has them working on reshaping credit product to fit the fashion. Only 14?
The shallow talent pool will hinder the long tail of banks needing to respond with the depth APRA is looking for.
“Institutions should choose approaches appropriate to their circumstances,” APRA said. The regulator is no doubt thinking that the myriad of sub-scale ADIs that cannot even report reliably (think Pillar 3s) might