A Bit of Empathy for the Central Banker; They Just Might Save the World
By James Vaccaro, Executive Director, Climate Safe Lending Network, July 2021
Spare a thought for the central banker, won’t you?
It’s not an easy job. It’s something, we assume, that suits the technocrats rather than the entrepreneurs. That feels like an unfair tag to place on many central bankers I have met who are frequently inquisitive and passionate about what they do. But it’s probably a fair categorisation to consider them as analytical and fact-seeking; poring over the ever-growing volumes of data being produced. Central bankers also tend to be mostly invisible to the public unless something goes wrong where the central bankers get blamed and labelled as “experts” who failed to predict the future clearly enough.
The secret to success for a central banker was deemed to start with having a ‘clear mandate.’ “Central banks know where they are going…” said the General Manager of the BIS in 2005 at the same time as subprime loan markets were rocketing before it all fell apart a couple years later. But who tells the Central Bank what their objectives are and how clear is that now?
Ultimately, the central bank mandates come from the governments, or more precisely the treasury and finance departments of the government. These departments set the parameters that the central bank can then use its expert judgment to regulate without further government interference. One of the common prime objectives for all central banks is financial stability. Given that climate change is undermining long-term sustainability (by which we mean the rest of this century), and furthering the breakdown of natural systems capable of supporting the growing human population, the ‘clear mandate’ to ensure financial stability’ is looking a lot fuzzier.
The New Mandate
Ensuring stability in the long term is difficult to fully grasp or define. The Bank of England has extended its scenario analysis to 30 years for climate change, but this only takes us to 2050. What we know is that the greenhouse gases locked in the atmosphere by 2050 are likely to keep pushing up warming effects, maybe with feedback loops speeding up warming and leading to change that can’t be reversed. In the UK, the Treasury has written to the Bank of England to ‘incorporate’ net-zero into their considerations, but the UK doesn’t yet have a comprehensive strategy for achieving its own targets.
So, we’re expecting a lot from these central bankers who crave stability: to figure out what to do in the backdrop of massive global environmental and social instability. The industry these bankers are regulating is not one that traditionally thinks about the long term. The tools that central banks now have at their disposal mean they have a huge degree of influence in the system. Central bankers can change the rules which govern the attractiveness of financial institutions to allocate funds in a particular direction. Very recently, central banks said they would change the rules on trading cryptocurrencies like bitcoin because of concerns on volatility, but the same logic is not yet being applied to climate change or on activities like financing the expansion and exploration of fossil fuels which are deemed to be incompatible with 1.5oC scenarios by the IEA. Central banks’ power can come with challenges to legitimacy, prompting some to ensure that central banks don’t become political and instead stay neutral.
The problem is, there is no neutral. Models that project data forward, no matter how ‘accurate’, are still acts of faith. The more that central banks wait for evidence (based on past data) to prove the risks in the future, the more there is a real risk that we move too slowly to mitigate future existential threats. This is where the ‘precautionary approach’ comes into play. Sarah Bloom Raskin (previously on the Board of the US Federal Reserve) recently argued for central banks to act preemptively on a precautionary basis. There’s a fundamental difference between dealing with fragility (by reacting to events as they happen) compared with designing for anti-fragility (through a dynamic and proactive learning approach). At the Climate Safe Lending Network, we convene banks and bank stakeholders from across the system to design for anti-fragility, through harnessing the collective intelligence of the Network and engaging in dynamic and proactive collective learning.
Making Central Bankers Heroes
Whilst there’s all sorts of busy-work on climate risks happening within central banks, there’s not enough action being taken to start seeing any improvements to the climate. Indeed, many central banks still use their immense purchasing power in the bond markets to prop up the most polluting parts of the economy – again, under the banner of ‘neutrality.’ Central banks are even being taken to court for their insufficiency on climate action. Currently, the underlying philosophy behind climate finance regulation is a focus on risk disclosure – such as the Taskforce for Climate-related Finance Disclosures (TCFD) which looks at how the world impacts finance, rather than the other way around.
That complementary process would require a Taskforce for Finance-Related Climate Impact (TCFI) looking at what finance is doing to the world and at what contributes to long term systemic risks. Such a process could clarify the new objectives that we need central bankers to organise around. With growing evidence that disclosure is insufficient for change within the financial system, a new process would require central bankers to intervene more proactively, changing the rules to shift the flows of finance in line with broader environmental goals that underpin stability. If that happened, it would mean considerable changes, beyond technical analyses, in the culture, competences and behaviours within central banks. How can the central bankers discover the heroes inside themselves, to cast off the ‘technocrat’ identity, and to embrace their position as leaders? Central banks need to be challenged in the courts, but the individuals within them have the chance to be the unlikely standard-bearers for long-term positive change.
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