that would have allowed advanced banks to estimate the degree to which their assets might behave similarly or default together. for the time being, we have decided instead to establish standard estimates of diversification that banks would apply. i know that many members of the iif have accepted that choice as prudent for now, but you have also cautioned us that this decision is incompatible with the existing treatment of market risk and the emerging practices in operational risk management. we know that some banks are making commendable progress in thinking about ways to estimate the value of diversification. nonetheless, we remain concerned about the degree of confidence one might have in those estimates, given the relative lack of data available on which to base them. furthermore, we are concerned that it would be difficult for third parties to validate any estimates at this time. finally, we are not convinced about the consistency of application of these diversification effects. for example we are not certain that any leading bank today consistently adjusts the value of all of its assets based on each asset ’ s contribution to diversification. portfolio theory suggests that an obvious next step to further enhance the risk - sensitivity of the capital framework would be to incorporate calculations of diversification benefits into the framework. in the coming years, and we can start very soon, we look forward to working with banks, with banking associations such as the iif, and with academics and researchers to find ways to move basel in the direction of full credit risk models, and to harness other improvements in risk measurement and management practices. as we consider the long - term view, we should not lose sight of the fact that we are just at the beginning. the new accord represents another important milestone in the adoption of more advanced risk measurement and management practices. but to remain robust and relevant to the demands of twenty - first century banking, our capital regulations must keep pace with changes in the market environment and with the state of the art in risk management. on that note, i would like to emphasise the importance of research and debate in promoting the safety and soundness of the financial system. the basel committee owes a debt of gratitude to the studies and efforts undertaken by economists, risk management professionals, and researchers in both the public and private sectors as we have sought ways to refine the proposals. we know that your work has helped to inform ours. the future evolution of the accord will be dependent on input and contribution from the industry, and i look forward to continuing our healthy and fruitful exchange of

levels, desertification, greater risk of wildfires, etc. in the case of spain, the national plan for adapting to climate change 2021 - 20303 suggests that these risks have already started to materialise. also, according to the european environment agency, extreme weather and climate events have already caused direct economic losses in spain totalling more than €60, 976 million since 1980. 4 the https : / / www. ipcc. ch / report / sixth - assessment - report - cycle /. strategy for financing the transition to a sustainable economy, european commission, july 2021. plan nacional de adaptacion al cambio climatico ( pnacc ) 2021 - 2030, ministerio para la transicion ecologica y el reto demografico, september 2020. economic losses from climate - related extremes in europe, european environment agency, february 2022. european commission estimates, in its 2020 report, 5 that a global temperature increase of 3°c could result in an annual welfare loss of around 1. 4 % of gdp in europe, with the greatest impact arising in southern europe. meanwhile, transition risks relate to the costs that may arise during the transformation of the economy needed to mitigate climate change and minimise the impact of the physical risks. the implementation of public policies necessary to achieve these objectives, the development of less contaminating technological innovations and changes in consumer preferences in favour of lower - emission goods and services will lead to a reallocation of resources between sectors. if this is not a sufficiently smooth process there could be significant economic disruption. channels of transmission to financial institutions financial institutions are exposed to the above - mentioned risks both directly and indirectly. this issue has been addressed by various studies and institutions. for example, in the banking field, the basel committee on banking supervision ( bcbs ) published a paper in april 20216 dividing transmission channels into two groups : microeconomic and macroeconomic. microeconomic channels refer to the effect that the above - mentioned risk factors may have on institutions ’ counterparts ( borrowers ). macroeconomic channels refer to the negative effect that physical and transition risks may have on economic growth, which would also affect financial institutions. to illustrate these channels, transition risks may, for instance, arise from the introduction of green taxes, which would raise energy costs. this increase in costs may, in turn, drive up the prices of those goods whose production requires more energy and, subsequently, a decrease in the demand for them, affecting firms