This case describes the deliberations of a financial regulation policymaker at the Dutch Central Bank, Johanna Baks. She is asked by the central bank’s Board to recommend regulations that are conducive to the Netherlands curbing climate change, since the Board officially recognizes this as a threat to long-term financial stability. The financial sector claims that a lower capital requirement for catastrophe bonds and climate bonds is the solution.
Johanna researches this option, as well as several other ones. These other potential financial regulations are: mandatory inclusion of environmental, social, and governance (ESG) factors in supervised financial institutions’ internal models, mandatory public disclosure of ESG factors of the organizations’ investments, a financial transaction tax, prohibiting universal banking and/or limiting banks’ sizes, and supervising financials on social aspects like their culture and gender diversity.
Johanna assesses the potential effectiveness of these regulations, both in terms of impact as well as stakeholder acceptance. Her stakeholders are the general public, politicians & government, other countries’ regulators, and the financial sector. In her impact assessment, Johanna pays particular attention on how to balance the public good of avoiding systemic risks in the financial system against the risk that climate change poses to financial stability.
In this case, students will get acquainted with how financial regulation is made and how some of these could contribute to (or threaten) various sustainability aspects within a society. They will learn about some financial regulations that are currently being discussed at supervisory authorities in the world. Students will be challenged to think about the different kind of environmental, social and economic effects that each of these regulations can have separately, as well as in combination with each other. In doing so, students will also get a sense of the fine art of balancing the interests of the different stakeholders.
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