Volume 2: Issue 8

Commentary: Banking Risk = Environmental Risk (Pillar #1)

 

As I look back at events of the past couple of weeks, I can't help but compare the similarities between the banks and our planet when it comes to risk and matching maturities. In banking, it is essential to match the maturities of assets and liabilities. This ensures the bank is not caught off guard when its liabilities come due and it is not able to meet its obligations. The fundamental issue with SVB was the mismatch of maturities of its assets and liabilities, leading to a liquidity crisis.

 

The environment has a similar issue. If the environment were a bank, Mother Earth wouldn't have the resources to add deposits as fast as humanity is withdrawing them. This failure is depleting her natural resources, accelerating loss of biodiversity, and causing irreversible damage.

 

Just as a run on a bank is disastrous, an environmental catastrophe has severe consequences. A run on a bank occurs when depositors lose confidence in the institution and rush to withdraw their funds, leading to a liquidity crisis. Similarly, an environmental catastrophe will trigger a chain reaction of events that will have a catastrophic impact on our planet and our society. 

 

Environmental risks take many forms — from pollution and deforestation to climate change and biodiversity loss. The risks associated with climate change, for example, are enormous and far-reaching. The warming of our planet has led to rising sea levels, more frequent and intense extreme weather events, and the displacement of millions of people. The potential economic, social, and environmental costs of these changes are incalculable.

 

As a society, we must take both banking and environmental risks seriously and work together to ensure a sustainable future for ourselves and the next generations. We need strong leadership, careful risk management practices, and attention to the matching of maturities in both cases. We cannot afford to ignore these risks. The consequences of doing so will be irreversible. We have the power to mitigate this risk. Do we have the leadership and courage to do so?

 

Join our “How-To” workshops at the INTEGRATE 2023 Conference June 20 & 21, 2023 at Fordham University in New York City for an in-depth review of Risk Mitigation and Corporate Governance.

 

Stay informed with the latest insights on our blog:

 

The Guardian | The UK could suffer 500,000 job losses and be forced to spend £674bn of taxpayer cash to rescue its banks and ensure financial stability, unless the City prepares for the value of fossil fuels to collapse as a result of climate crisis regulations, research shows. Read now

 

Syracuse University | Despite government intervention, it is very hard to tell how safe the banking system really is, and whether these new government backstops are going to end up costing taxpayers. Banks are not required to disclose how much less their bond and loan portfolios are worth due to the rise in interest rates. Read now

 

The Federal Reserve | Financial regulators, international organizations, market participants and others have directed significant attention in recent years towards developing an understanding of the implications of climate change for the financial sector and financial stability. Read now

 

European Central Bank | Climate change has a significant impact on the economy, both directly and indirectly through the actions taken to address it. While significant macroeconomic impacts from climate change may occur in the more distant future, some impacts are already beginning to be felt. Read now

 

IMF | IMF analysis of current global climate targets shows global emissions will deliver an 11 percent cut — less than half of the minimum reduction that is needed. We need higher ambition, stronger policies, and more finance for implementation. Read now

 

 

As Deputy Managing Director at the IMF, Bo Li is responsible for the IMF’s work in about 90 countries as well as on a wide range of policy issues. 
 

Before joining the IMF, Mr. Li worked for many years at the People’s Bank of China, most recently as Deputy Governor. He earlier headed the Monetary Policy, Monetary Policy II, and Legal and Regulation Departments, where he played an important role in the reform of state-owned banks, the drafting of China’s anti-money-laundering law, the internationalization of the renminbi, and the establishment of China’s macroprudential policy framework.

 

Outside of the PBoC, Mr. Li served as Vice Mayor of Chongqing — China’s largest municipality, with a population of over 30 million — where he oversaw the city’s financial-sector development, international trade, and foreign direct investment.

 

Mr. Li holds a Ph.D. from Stanford University and an M.A. from Boston University, both in economics, as well as a J.D., magna cum laude, from Harvard Law School. He received his undergraduate education from Renmin University of China in Beijing.