How bank recovery and resolution frameworks can provide a blueprint for transition planning

The unfolding climate crisis is triggering the emergence of new regulatory tools to support banks in the management of risks related to policy, technological and customer behaviour change in the transition to a sustainable low-carbon economy. These, especially transition plans, seek to improve the ability of banks and supervisors to identify, mitigate and manage the short-, medium- and long-term risks associated with climate and environmental risks at the individual institution level and the financial system as a whole.

This report draws on the parallels between recovery and transition planning to identify lessons relevant for policymakers and regulators working on bank transition plans, focusing on internal bank governance, supervisory processes and cross-border coordination in the European Union.

Key messages

• Policymakers face difficult choices regarding the definition of the regulatory framework for transition plans, their specific content and form, related supervisory powers, and coordination across borders.
• Prudential supervisors have an important role to play in ensuring the credibility of transition plans through providing direct and indirect intervention in the form of guidance without prejudicing the business-related decisions taken by financial institutions and companies.
• Banks’ transition plans should reflect the transition pathways across the home and host jurisdictions in which they are active. Banks that are globally systemically important and other banks that operate across borders should therefore develop group-level strategies for how their operations align with various country-level transition strategies, reflecting nationally determined contributions to the Paris Agreement, energy mixes and sectoral specialisations.
• Global supervisory cooperation frameworks should facilitate a dedicated transition plan regime for cross-border banks with a view to enhancing trust and mutual understanding between relevant supervisors.
• In drawing on parallels with post-crisis bank recovery and resolution planning frameworks, the authors have identified several lessons for today’s policymakers and regulators working on transition plan regimes for banks, including:
  • A strong business case for transition planning as well as recovery planning to improve internal organisational knowledge and engagement with real economy clients through incorporating concerns about dynamic policy, technological and consumer behaviour transition across different business lines.
  • Several lessons from the integration of recovery planning into supervisory processes, such as the need to: avoid excessive complexity; clarify the role of supervision; balance public and private disclosures of bank plans; elaborate on the cross-border dimension; and provide a strategic supervisory focus on function rather than a narrow emphasis on legal form.
  • Building trust between banks and authorities, and facilitating cross-border financial stability could enhance cross-border supervisory cooperation, although unmanaged divergence across jurisdictions may constrain cooperation and impede the exchange of information and experience.