Moreover, as in the case of any structural change, the past may not be a useful guide to the future, so that different climate transition scenarios should be considered and their implications analysed, irrespective of the behaviour of borrowers in the past. This is precisely the main contribution of one of the macroprudential tools made available to financial sector supervisors since the international financial crisis: stress tests. The 13  Margarita Delgado, “Energy transition and financial stability. Implications for the Spanish deposit-taking institutions”, Financial Stability Review, autumn 2019, https://www.bde.es/f/webbde/GAP/Secciones/Publicaciones/InformesBoletinesRevistas/RevistaEstabilidadFinanciera/ 19/noviembre/Review_EF_Autumn2019.pdf. 5  Banco de España, like other international supervisors, is developing the necessary methodologies to perform this type of exercise for climate risks. Developing these methodologies, however, is not without difficulty. First, there are significant information gaps that need to be covered as soon as possible. On one hand, only large firms have estimated their carbon footprints and practically none of these estimate their footprint when the inputs incorporated into their productive process are included. On the other hand, there is no centralised register of energy ratings of homes, the heating and cooling of which accounts for around 25% of total emissions, these being the main collateral for credit transactions through the creation of mortgages. These examples are just some of the most notable difficulties involved in evaluating such risks. On balance, I consider that supervisors can play an important role in this area by identifying and disseminating the information necessary to assess the associated risks.

This is recognized by the G20 leaders, at their recent Summit in Toronto, which make more effective supervision the second of the four pillars of its strategy towards more resilient financial systems. The FSB is engaged in a thorough review of supervisory practices. 28. With hindsight, the way supervision is conducted should be enhanced in two directions: 29. – First, supervision should be intrusive into the affairs of regulated firms.   Weak intrusiveness was a problem because supervisory rules such as Basel 2 rely extensively on banks’ own risk valuation, management and governance. It was also a problem because discipline imposed on banks by investors did not always work: due diligence was weak and rating agencies were conflicted. If market discipline does not bind early on and if supervision is not intrusive because it follows a lighttouch approach, then failures in banks’ internal oversight and systems are mechanically imported into supervisory assessments, without adequate checks and balances. The consequences of this have been dramatic for some financial systems.   In practical terms, being intrusive for a supervisor means having the capacity to go beyond off-site control and engage frequently and consistently with banks through on-site inspections. 30. – Second, supervisors should develop a proactive attitude; why?   Regulated entities have powerful incentives to arbitrage regulation, to keep complying with formal regulation while at the same time maximizing returns through unheeded risk taking. As time flows and risks are moved outside of the regulatory radar, supervision loses its grips on risks to financial stability.