The last few years have seen steady improvements in the capabilities of banks and their supervisors to identify and manage climate risk. These microprudential actions are necessary but not sufficient to improve the resilience of the financial system. Climate risk is a systemic issue. A macroprudential approach at the system level is needed.

The imposition of systemic risk buffers has potential but banking supervisors tend to set capital buffers at relatively low levels, making them less effective. Given the limitations of buffers, we explore the possibility of applying bank-specific macroprudential limits for financed emissions, starting from a baseline and extending forward to 2050. Although such limits may stretch central bank mandates, they have the potential to improve the resilience of the European banking system.

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