Transcript of Question & Answer Session Climate Change Risk in the Financial System

Thank you very much, Dr Kearns. Any questions? Any commentary on your thoughts about the impact of climate change on credit and the financial services industry?

I'll ask a question. Dr Kearns, just a practical one and, I guess, within the confines of the four walls and the virtual world out there in which we're talking: how difficult is it for the RBA, when you're trying to pass the findings of the work you do to government, to get policies to change?

We work closely with the Council of Financial Regulators on issues related to climate change. We have our mandate, and the Reserve Bank's mandate is obviously for controlling inflation, employment … attempting full employment, and we have a mandate for financial stability risk. So climate change potentially affects the operation of the economy, the structure of the economy, and has implications for financial stability, as I've outlined today. So our work is very much involved in communicating those risks. We're not advocating for particular policies, but we do have very close collaboration with the government, through Treasury, to discuss what those implications are and provide our views and expert opinion where we have that. Thank you.

Thank you for that, Jonathan, it was interesting. I'm going to put you on the spot, and I hope no­one quotes you after this. I'm curious about the tension between the definition of 'financial stability' and 'financial inclusion', because without inclusion, we won't have participation, without participation, that is an instability in itself. So how far through that debate does the Reserve Bank have an opinion?

This is something that gets a lot more attention in many other countries where you have weaker levels of financial inclusion and, in some of those countries, the Central Bank may actually have a mandate to deal with financial inclusion. In Australia, we don't. We do have very broad levels of financial inclusion, even relative to other rich OECD countries, the share of people who have a bank account is much higher here than it is in some other OECD countries. So were that to become an issue for financial stability, then it would enter into the Reserve Bank's mandate. But where it's a very small share of the population who do not have broad financial inclusion and, for some of them at least, it's by choice, not all, potentially. So then the implications at the moment for the Reserve Bank aren't significant and so aren't something that enters into our work. But, we work closely with a lot of the other agencies, and this is sort of more important for ASIC, for example.

I was just going to say, when you ask a question, if you could say who you are and what your organisation is, it might help the speaker to understand the question.

Diane Tate Australian Finance Industry Association. So this is a bit out of the remit of my finance members, but they're very interested in what insurers do, as you said, there's an interconnectivity in the financial system. So let's take Lismore as an example and scenario that out a little further. Now, we know there's a lot of people who weren't insured in Lismore. That is inevitably going to become a public problem. It is already an insurance market problem and it certainly is an inclusion issue. So, when we start to interpret financial inclusion as much as marginalisation but as exclusion, because markets can't solve problems because they can't price it or they're not willing, what do we do then?

I think that is a significant issue to consider in the risks of climate change. The insurers can write one-year contracts and so choose to not continue writing contracts in a particular area, or increase their premiums. The banks have potentially longer exposure because they might still have a mortgage written on that property, and the bank's contract requires you to take out insurance but, all of a sudden, you're not taking out insurance. So then, if you get an extreme event come through which reduces the value of the property, the bank's loss given default has increased. So there is significant ongoing risk for the banks. For society more broadly, I think this is a very significant issue and it becomes a broad public policy consideration. So, if you are going to have areas where insurance is either not available or too expensive relative to the incomes of people in those areas, then you get broad societal impacts where climate events are going to have severe impacts for the society and for the local economy, and where private institutions have chosen not to be providing insurance in those areas, where does the risk ultimately fall? And, presumably, it's going to be on the individuals and then, presumably, also on the government, if they're required to step in. So, I mean, you need to plan and think about that: how do you respond to that? Well, where are the areas that are going to be more exposed to severe climate events? And perhaps we need to avoid having assets in those areas, so reduced home building and reduced amounts of business assets as well. That requires a lot of planning, and we need foresight about where the effects of climate risk are most likely to be severe. It's a great question, thank you.