(Mis)managing Macroprudential Expectations

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(Mis)managing Macroprudential Expectations

How Central Banks Govern Financial and Climate Tail Risks

9781800887589 Edward Elgar Publishing
John Hogan Morris, Assistant Professor of Economic Geography, School of Geography, University of Nottingham and Hannah Collins, Postgraduate Researcher, School of Agriculture, Policy and Development, University of Reading, UK
Publication Date: June 2023 ISBN: 978 1 80088 758 9 Extent: c 208 pp
Using a range of calculative devices, (Mis)managing Macroprudential Expectations explores the methods used by central banks to predict and govern the tail risks that could impact financial stability. Through an in-depth case study, the book utilises empirically-informed theoretical analysis to capture these low-probability and high-impact events, and offers a novel conceptualisation of the role of risk modelling within the macroprudential policy agenda.

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Using a range of calculative devices, (Mis)managing Macroprudential Expectations explores the methods used by central banks to predict and govern the tail risks that could impact financial stability. Through an in-depth case study, the book utilises empirically-informed theoretical analysis to capture these low-probability and high-impact events, and offers a novel conceptualisation of the role of risk modelling within the macroprudential policy agenda.

The book asserts that central banks’ efforts to capture tail risks go beyond macroprudential policy objectives of identifying and monitoring systemic risks to financial stability. It illustrates how the calculation of tail risk contributes to managing the expectations that regulated institutions have around the Bank of England’s macroprudential approach, its willingness to support struggling institutions, and its use of novel macroprudential policy tools. Situating tail risk within the broader realm of climate finance, chapters contend that the identification of future climate tail risks simultaneously reveals opportunities for private profit and non-bank lending within the financial system, in ways that are potentially destabilizing. The book concludes by highlighting the social and political limitations of central banks’ new macroprudential approach.

Transdisciplinary in approach, this book will be invaluable to students and scholars interested in the intersections between climate studies, political science and public policy, environmental economics, banking and finance, and political economy. Its practical applications will also be a useful resource to climate and finance policymakers working in central banking.
Critical Acclaim
‘Why have central banks become preoccupied with developing strategies for coping with “tail risks” – highly unlikely but extremely damaging events? And what are the implications of these shifts in their practices for our collective ability to respond to the climate crisis? In this ground-breaking book, John Morris and Hannah Collins tackle these key questions by demonstrating how the Bank of England uses the governance of tail risk to actively reshape markets and change financial institutions’ expectations about their “carbon futures.” Crucially, they point to the dangers of reducing the governance of climate change to a calculable and profitable form of tail risk. As credit rating agencies, shadow banking institutions, and insurance companies begin to find new ways of profiting from these climate risks, they warn, it is the most vulnerable countries and populations that are likely to pay the highest price.’
– Professor Jacqueline Best, University of Ottawa, Canada

‘A hugely impressive achievement and a very important read when considering the turbulent economic times in which we live. Morris and Collins lift the lid on the cognitive and calculative tools currently being used by central banks as they seek to secure the future against uninsurable financial risks.’
– Matthew Watson, University of Warwick, UK

‘The high-impact low-probability events of the global financial crisis prompted a powerful transformation of the probabilistic risk management practices of financial stability governance. Focused on the Bank of England, Morris and Collins show how this transformation has been enacted through novel devices of calculation and regulation, and how it is currently shaping the role of central banks in climate change governance.’
– Paul Langley, Durham University, UK
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