Households and businesses didn’t have a great deal of choice and opportunity when it came to finance. But look at what’s happened in the past ten years. As banks have been made safer and mechanisms put in place to deal with them if they fail, the too-big-to-fail public subsidy for banks has fallen by 90%.17 It’s therefore no accident that our banking system is now more diverse. In the past year, for example, banks other than the big six have accounted for more than half of new lending to households and all of the net lending by banks to UK businesses. And it’s no accident that our financial system is more diverse. On net, all of the growth of credit to businesses since the crisis has been centred in non-bank forms of debt finance. The lesson: reforms that promote stability can unlock opportunity for the system to serve the economy by levelling the financial playing field. That lesson applies now to our work on climate risks. Our primary aim is to ensure the system is resilient. But by forcing the system to measure, disclose and confront future risks, we could unlock the opportunity for finance to help the economy in its transition to carbon neutrality. See speech by Mark Carney (April 2017): ‘What a Difference a Decade Makes‘.
For example, around 10% of the value of mortgage lending in England is on properties in flood risk zones.11 Some UK banks also have large direct exposures to regions that are particularly vulnerable to the physical risks from climate change such as South and South-East Asia. At the same time, the system will need to manage the risks associated with the economic transition that will be associated with reducing carbon emissions. Over 190 countries have committed to limit the global temperature rise to well below 2°C. The UK government is targeting a 100% reduction in net emissions by 2050.12  The transition to a carbon neutral economy will see material structural changes in the UK and world economies. Some assets may become stranded: if global warming is to be limited to well below 2°C, close to 80% of remaining coal reserves and half of remaining oil reserves would become un-burnable.13 Many other sectors, which ultimately rely on carbon emissions, will see their profitability and businesses challenged. We cannot allow the financial system to be an obstacle to making the transition because it can’t deal with it. See Chart 1 in speech by Mark Carney (April 2018): ‘A Transition in Thinking and Action’. Sources: Munich Reinsurance Company, Geo Risks Research, NatCatSERVICE. 10 Intergovernmental Panel on Climate Change (2018), ‘Global Warming of 1.5°C ’.