A senior Bank of England official has moved to reassure markets that UK banks maintain strong commitment to climate goals, despite recent high-profile departures from a major international net zero alliance.
NZBA Collapse and Bank Responses
David Bailey, the executive director of prudential policy at the Bank's Prudential Regulation Authority, addressed concerns following the withdrawal of major lenders including HSBC and Barclays from the UN-backed Net Zero Banking Alliance (NZBA). These exits ultimately led to the closure of the once-prominent alliance last month.
American banking giants JP Morgan and Goldman Sachs had begun abandoning the NZBA ahead of Donald Trump's inauguration last autumn, with analysts suggesting the moves were intended to pre-empt criticism from right-wing US politicians. The departures of HSBC and Barclays by early August left the alliance critically weakened, prompting a review that concluded with its shutdown in early October.
Regulatory Assurance and Ongoing Monitoring
Bailey emphasised that engagement from financial institutions on climate matters "remains as vibrant... as it has over the past couple of years." He confirmed the Bank of England continues to focus on its responsibilities regarding financial risks arising from climate change, with firms maintaining active dialogue with regulators.
The Bank's Prudential Regulation Authority, which pioneered climate preparedness testing across the financial sector in 2021, is keeping open the option of conducting further climate stress tests. These exercises would assess the banking sector's readiness for disasters linked to global heating.
Balancing Climate Against Other Emerging Risks
However, Bailey noted that climate risks must be considered alongside other emerging threats to financial stability. Regulators are simultaneously addressing potential dangers in areas such as the booming private credit sector, an unregulated segment offering business loans.
"We do, of course, have to put climate risk into proportion alongside all the other risks," Bailey stated. "We can't focus just on one risk... But we've got to focus on climate risk. It's important. And we continue to maintain the momentum of our work in that space."
Meanwhile, the PRA is undergoing leadership changes with Sam Woods stepping down as head in June. Bailey, described by peers as a dedicated and "straight-backed" regulator, is considered the internal frontrunner for the £314,000-a-year position. Katharine Braddick, a senior Barclays executive with Treasury experience, has also been named as a potential candidate.
Bailey has been working on significant banking reforms, including the "strong and simple" framework designed to ensure smaller lenders like Metro Bank and Starling aren't burdened with the same complex regulations as global banking giants. He described this as one of the biggest regulatory changes in 30 years, aimed at helping smaller banks "compete and grow, and provide the really important services they do to households and businesses right across the UK."
