The world’s financial system has been upended

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While politicians across Europe have been fighting a culture war over air-conditioners and the causes of the deadly heat shock, central banks have been taking matters into their own hands.

The Bank of England has slipped through market notice 11, entitled “Changes to collateral eligibility in the Sterling Monetary Framework”.

In essence, it warns that fossil fuel companies will face bigger haircuts from October onwards. Their debt will be worth less as collateral for borrowing money or securing a trade, depending on how far along they are on the green-to-brown spectrum.

This seemingly minor adjustment in the city’s plumbing can have far-reaching effects. It will not stop fresh drilling in the North Sea, but it is a warning to Shell, BP and the other European oil majors that they may face a penalty if they abandon the “green stuff” and keep doubling down on oil and gas.

“The implications are pretty serious. They won’t be able to repo their paper so easily,” said David Owen, a bond expert and founder of Saltmarsh Economics.

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Lenders will also have to integrate the financial risks of climate change in their stress testing and models. “The direction of travel is clear. Banks are going to have to set aside more capital when lending to some fossil companies,” he said.

The European Central Bank (ECB) is acting in parallel, using pillar two of the global “Basel regime” to squeeze loans to high polluters and shift incentives for the capital markets.

Banks in Europe already have to run a stress test for a “fossil debt shock”. The ECB is selling down its own holdings of corporate bonds with a high carbon footprint. It is exploring extra capital charges for........

© WA Today