Macroprudential policies for addressing climate-related financial risks: challenges and trade-offs

The paper discusses how macroprudential policies are designed to maintain financial stability by strengthening the financial system and limiting systemic risks. However, the standard macroprudential instruments, like capital add-ons, may not always work well to address climate-related financial risks, as they could worsen transition risks. The authorities must clearly define macroprudential policies' scope to mitigate these negative impacts. The paper emphasizes that if these challenges are not addressed properly, then macroprudential policies can become ineffective and even work against the goal of financial stability.  The paper concludes that while it is a complex task, addressing these challenges is necessary to ensure the effectiveness of macroprudential policies for financial stability and mitigate climate change’s effect.