BC’s role is not to make environmental policy, but to focus on risk, says director

The regulation director of the Central Bank, Otavio Damaso, said this Monday (22) that the BC’s role in its sustainability agenda is not to make environmental policy, but to alert and demand that financial institutions pay attention to social risks , climatic and environmental.

“The BC’s role in this issue is not to make environmental policy. First, it is to alert and demand from the institutions that make up the financial system to pay attention to the risks that arise from issues related to sustainability, which are social, climatic and environmental”, said in a virtual event promoted by FGV (Fundação Getulio Vargas).

According to the director, climate risks directly affect banks’ assets, for example. “O [risco] social impact affects the image, has a legal and operational risk. The environmental affects the aspect [de concessão] credit”, he quoted.

“Of course, there is a whole development of sustainable finance, which is one of our goals to develop,” he continued.

Damaso presented a balance of BC’s institutional agenda, called Agenda BC#, in which the sustainability theme was included at the end of last year.

As a result, the monetary authority launched a series of ESG measures (acronym for good environmental, social and governance practices) for financial institutions in September this year.

One of them requires the inclusion of climate change in banks’ risk management as of July 2022.

With the change, BC now requires banks to incorporate potential losses from climatic shocks in the calculation of risks, which impacts, for example, analysis for granting credit.

The measures generate practical effects within the financial statements of banks. Poor stress test results, for example, will require more capital to address the risks.

Financial institutions already had to include social and environmental issues in the calculation of risks, but there was no obligation to measure climate change specifically.

A new standard for fintechs should be released in the coming months, the result of three public consultations launched at the end of last year. The change is expected to increase capital requirements and tighten credit risk criteria for payment institutions and credit fintechs.

When asked about the design of the new regulation, Damaso said that many payment institutions, which have less demanding rules than banks, have created financial arms and have become bigger.

“It is an adaptation to a regulation compatible with its complexity [da instituição] and the risk to the financial system,” he pointed out.

The director considered, however, that the autarchy must still maintain the “easy entrance” to this type of institution. “BC has entered the wake of creating a more competitive environment and an easy entrance. It will hardly return [à regulação antiga] because this is very beneficial and helps innovation,” he pointed out.

He explained that if the payment institution maintains the original size and functions, it must remain within the same rules. If the company gains dimension, it must be framed in the new requirements.

Damaso highlighted that BC has intensified dialogue with smaller financial institutions, such as fintechs, and with society.

“In recent years, the BC has opened up to conversations with all regulated entities, with small [instituições], medium and large at the same intensity. Also with society,” he pointed out.

The director also pointed out that BC regulation has focused on competitiveness and innovation measures. “We want a competitive financial system”, he stressed.

Damaso cited open banking, which is in its third phase of implementation and should be fully publicly available by the end of 2022.

Open banking is a set of rules and standards established by BC for data sharing, under the express authorization of the client, between financial institutions.