For example, the Central Banks and Supervisors Network for Greening the Financial System, commonly known as the NGFS, in which over 40 central banks and supervisors have already reached a consensus: and I quote, “climate-related risks are a source of financial risk and therefore fall squarely within the mandates of central banks and supervisors to ensure that the financial system is resilient to these risks.” The HKMA is a member of NGFS, and we are fully on board with this 7. The Bank for International Settlements is also committed to supporting green finance and investment practices, and supports the NGFS research on climate-related risks and their implications for financial stability. 8. The HKMA has many roles – as a bank regulator, one of the largest asset owners globally, and a key promoter of market development. Hence, the HKMA is in a very advantageous position to promote green and sustainable finance in Hong Kong. In May this year, we unveiled three sets of measures on green finance: 9. The first measure is a three-phased approach to promote Green and Sustainable Banking in Hong Kong. Initially, to develop a common framework to assess the existing baseline of individual banks to establish how “green” they are, by talking to the industry to identify the parameters to be included in the assessment; secondly, to engage and consult the industry on whether supervisory requirements are needed; and if needed, how the HKMA should develop our supervisory expectation or requirements; and thirdly to focus on implementation, monitoring and evaluation. 10.
It is possible to further decompose ROE to provide additional insight into how banks increased reported returns as follows:  BIS Review 95/2010  9  Banks can boost ROE by acting on any of the terms on the right-hand side of equation (1.1): increasing assets relative to capital (financial leverage), holding a larger proportion of capital 4 other than as common equity (common equity margin), or assuming a greater degree of risk per unit of assets (return on risk-weighted assets, RoRWA) – leveraging assets, leveraging capital structure or leveraging regulation. Table 4 shows two of the elements of this breakdown for the major global banks – leverage and unit risk. For most banks, the story is one of a significant increase in assets relative to capital, with little movement into higher risk assets (unit risk makes a negative contribution for most banks). Those banks with highest leverage, however, are also the ones which have subsequently reported the largest write-downs. That suggests banks may also have invested in riskier assets, which regulatory risk-weights had failed to capture. Table 5 looks at the third component, the common equity margin, of some of the same global banks. Among at least some of these banks, this margin makes a significant contribution to ROE growth, as banks moved into hybrid Tier 1 capital instruments at the expense of core equity. As such hybrid instruments have shown themselves largely unable to absorb losses during the crisis, this boost to ROE is also likely to have been an act of risk illusion.