It is essential for the financial sector to manage climate-related risks, while at the same time, support the economic transition. This means financial institutions have to internalize climate considerations into their business operations and risk management framework and offer financial products and services to help business transition especially in the high-emission and vulnerable sectors without disrupting the economy and leaving someone behind. However, there is no denying that financial sector has substantial gaps and challenges to overcome in order to achieve such goals, particularly on the risk management perspective. Financial sector resilience would be undermined by the climate-related risks without appropriate measures in a timely manner. Thus, central banks and financial regulators have a crucial role in building capacity and facilitating guidelines and tools needed for climate-related and environmental risks. The first step should be providing concrete expectation and guidance for financial industry to uplift their business operations, risk management, and disclosure that align with international standards. Simultaneously, the infrastructures and common tools for climate risk management such as climate scenario analysis, stress test, and climate-related data  1/2  BIS - Central bankers' speeches  must be put in place to create an enabling ecosystem where financial institutions and regulators could assess and monitor the risks effectively. Ladies and Gentlemen, Looking ahead, it is thus inevitable that our regulatory and supervisory frameworks should take into account sustainability and climate-related factors. The conduct of prudential framework in this new landscape will arguably be the most difficult task as it is relatively new and still evolving.

This raises the question of whether this expansion has already entered its twilight years, with the risk of recession edging higher with each passing month. As I have said before, expansions do not simply die of old age. 1 Rather, expansions end either because a significant inflation risk emerges that requires a sharp tightening of monetary policy, or the economy is adversely impacted by a large shock that cannot be offset by monetary policy in a timely manner. While the sample of post-war U.S. expansions is still too small for reliable statistical analysis, the evidence suggests that after an expansion’s first few years its likelihood of ending is mostly independent of age, and depends mainly instead on the level of inflation. Since the possibility is low that a significant inflation risk would emerge over the near term, this means that the main danger facing the current expansion is the risk of large, adverse shocks. Given that the labor market still appears to have some excess slack and inflation is below the Federal Reserve’s objective, monetary policy is appropriately still quite accommodative despite the advancing age of the expansion. While this limits to an extent the degree to which monetary policy can aggressively respond to any adverse events, the good news is that the economy is more resilient to any shocks. Key sectors of the U.S. economy, such as the household sector, seem to be in good shape.