upcoming energy transition, as agreed upon by more than 190 countries in paris in december 2015, as one of our economy ’ s key long - term challenges. in the report we urged our government to pursue a plausible and practicable path towards a carbon - neutral economy, as such a long - term view enables households and businesses to gradually adjust their investments, preventing excessive misallocation. and we also decided to take a closer look into climate risks for the dutch financial sector as part of our supervisory mandate. ii. risks : a thematic review of climate risks in the dutch financial sector which brings me to the second part of this speech. what are the risks that we see as a supervisor in the dutch financial sector? in 2017 we conducted a thematic review on this issue. in this review we took a deep dive into four topics : - climate - related damages for the insurance industry - risks for the financial sector from a potential flood - risks from the financing of carbon intensive assets, so called ‘ brown finance ’ - risks from the financing of assets and projects that are meant to contribute to the energy transition, so called ‘ green finance ’. today i want to share with you some key findings for banks, regarding the risks for brown and green finance. in terms of brown finance, one of the things we wanted to do was get an understanding of the size of the risks. how big of a risk is the energy transition for our banking sector? as a first step, we wanted to measure how exposed our financial industry is to sectors that need significant reforms to become carbon neutral. sectors such as fossil fuel producers, the utilities industry, heavy industry, agriculture and transportation. this wasn ’ t something that we could easily get from our supervisory data. which is why we welcome the work that the commission will do on developing a taxonomy for the sustainability of financial assets as part of their sustainable finance action plan. for our research, however we had to develop our own template for our financial sector to fill out. we sent this template to the three biggest banks, covering around 70 - 80 % of the market. what we found is that banks ’ balance sheet consist of around 11 % of exposures to carbon intensive industries. not surprisingly, most of these exposures are through loans, which makes banks less sensitive to market fluctuations than for example pension funds. moreover, most of these loans have maturities of less than five years, which should provide banks with sufficient scope to anticipate changes. especially if the transition is more

. changes introduced by basel ii how will basel ii do a better job delivering on the four capital objectives i have described to you? it does so by moving capital regulation to a better point on a spectrum of two extremes. on one end of the spectrum, we have basel i - like regimes, which rely on rigid, externally imposed regulatory ratios which collapse under their own weight as rapid financial innovation and capital arbitrage proceed. the result is a breakdown in the link between risk and capital ( as we have seen in the example of structured credit exposures ). on the other end of the spectrum, we have full reliance on banks ’ internal credit models. here we run the risk of regulatory capital not putting appropriate constraints on banks ’ risk taking, and as we all know, the role of regulatory capital is to impose limits on banks that do not manage themselves in a prudent way. basel ii falls in the middle of this spectrum by leveraging off and reinforcing the basic building blocks of sound credit risk management, but filtering these elements through a rigorous regulatory framework. in particular, i am talking about requiring banks to have sound internal ratings classification systems that decompose any exposure into its probability of default, loss given default and exposure at default, subject to stringent supervisory standards and internal controls. moreover, these inputs are filtered through a regulatory framework where supervisors conservatively specify correlations within asset classes. let me elaborate a bit more on how basel ii does a better job of capturing the types of risk that banks increasingly face. some of the most important areas relevant to the current crisis are the following : • first, basel ii delivers greater risk differentiation. banks that move from prime into subprime mortgage lending or that move from traditional corporate lending into leveraged lending will see an increase in their capital commensurate with the changing business strategy and risk profile. under basel i, all such exposures receive the same charge. • second, off - balance sheet contractual exposures to sivs and conduits will be brought into the fold and subject to regulatory capital, whatever the accounting treatment. • third, there will be a much more risk sensitive treatment for securitisation exposures. this will create more neutral incentives between retaining an exposure on the balance sheet or distributing it in the market through securitisation. • fourth, banks will have to develop more rigorous approaches to measure and manage their operational risk exposures and hold commensurate capital. • fifth, banks will