Arab Monetary Fund sets guidelines for central banks to deal with natural disasters and climate change

Institution calls for greater co-operation with research centres modelling risks associated with natural and climate-related disasters

The  Arab Monetary Fund building in Abu Dhabi. The AMF urged central banks to ensure the continuity of RTGS and Swift networks during natural disasters. Private archive of Peter Mlodzianowski, Bucks (UK).
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Central banks in the region should develop frameworks to ensure banking and financial system stability during natural disasters, according to an Arab Monetary Fund report.

Regulators must also set up ad hoc, specialist management committees to prepare recovery plans, the report said.

The report called for the adoption of “a comprehensive governance framework in managing natural disasters and ramifications of climate change and addressing the potential impact”.

Natural disasters and climate change challenges have gained the attention of regulators across world due to their potential impact on financial stability.

The AMF’s report cited a London School of Economics study that said financial assets worth about $5.2 trillion (Dh19.1tn) would be at risk if the average temperature rose by 2.5°C above pre-industrial levels by the end of the century.

The same study said 0.5 per cent of financial assets would be affected under optimistic assumptions of the damage, while 17 per cent of assets would be at risk in a worst-case scenario.

The International Monetary Fund has put climate-related risks affecting the banking sector and financial stability into two categories – physical risk and transformation risk.

Physical risks include those related to natural disasters that lead to a loss of property, assets and infrastructure, which negatively affects public finances, the financial and insurance industries, businesses and people.

Transformation risks are related to potential financial losses on investment values as a result of climate change, including “stranded assets” such as coal mines which are not exploited as customers and investors increasingly move towards environmentally friendly products and practices.

In the report, AMF stressed the need to come up with a charter of co-operation for the co-ordination and exchange of information between central banks and other entities such as research centres that model the effects of environmental and natural disasters to limit their impact on the financial system.

Central banks were also encouraged to ensure the continued operation of RTGS and SWIFT networks to allow financial transactions to run smoothly during a crisis, the AMF report said.

“The issuance of these principles come to confirm that financial stability in the Arab countries is a priority for ... central banks and monetary authorities, while recognising that financial stability is closely linked to economic and social stability in the countries,” Abdulrahman Al Hamidy, director-general and chairman of the AMF board, said.

The Institutional Investors Group on Climate Change, a European body comprised of more than 230 pension funds and money managers with assets worth more than €30tn (Dh123.6tn) under management, set its own guidelines for dealing purely with physical risk last month.

It cited a new study that said damage worth $100 billion caused by extreme weather such as floods, heatwaves and droughts could be expected in the period through to 2040.

It pointed to the bankruptcy of US utility PG&E that was caused by wildfires in California as an example of the knock-on effect a changing climate can have on investors.