This is an extension of a worrying pattern that has seen the number of extreme weather events more than triple and inflation-adjusted insured losses rise five-fold in the past three decades.2  1 2  See Munich Reinsurance Company (2018), ‘A stormy year: Natural catastrophes 2017,’ Geo Risks Research, NatCatSERVICE Ibid. 2  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  2  The outlook is even more concerning. As noted by HRH, last month’s IPCC report shows that many land and ocean ecosystems have already changed due to global warming.3 It concludes that the physical risks of climate change will intensify even under 1.5 degrees of warming, including increased heatwaves, droughts, heavy rain, flooding, melting of sea ice, and species loss. In turn, this will have a marked impact on human health, livelihoods, food security, water supply, human security, and economic growth. And that is very much the IPCC’s best case scenario. The impacts will be significantly worse under 2 degrees, and the Paris commitments – even if fully implemented – are consistent with more than 2.7 degrees of warming.4 The longer meaningful adjustment is delayed, the more transition risks will rise. To deliver on the Paris Agreement commitments and limit temperatures to 1.5°C, carbon emissions would have to decline by about 45% from 2010 levels to 2030 to reach net zero around 2050.5 Even if this happens smoothly, it will have major implications for most sectors of our economies. If the transition is delayed and then happens abruptly, financial stability risks will rise considerably.

The buffers can then be drawn on when risks materialise and credit losses occur. The case of counter-cyclical buffers is particularly interesting, first because it is one of the tools with a clear macro-prudential orientation and second, because the ESRB and the European Banking Authority (EBA) could join forces for implementing the framework in Europe. This is suggested by the European Commission in its recent consultation paper on the potential role of the ESRB and the EBA in defining policies and standards that national authorities should follow. Concluding remarks Let me conclude. I see three reasons to expect relevant changes with the start of macroprudential oversight in Europe. The first and most important reason is that better supervision should contribute to a more stable financial system. This is as much to the advantage of all players in the industry as it is to everyone in the wider economy. Second, integrating a macro-prudential perspective should lead to better regulation. In essence, systemic risk is the outcome of the actions of individual market players for the system as a whole. Regulation, which traditionally focuses on individual market players, can be improved by taking account of this potentially disastrous side-effect. Initiatives such as the counter-cyclical buffers and possible capital surcharges or other equivalent measures for systemically important financial institutions fall into this category. The third reason for welcoming the ESRB is that macro-prudential supervision could improve financial firms’ own risk analysis.