The Swedish Riksbank, established in 1668 with a charter to lend funds to the government and act as a clearinghouse for commerce, is recognized as the world’s first central bank. In 1694, the Bank of England was founded. In addition to financing public debt, these pioneering central banks carried out banking activities themselves. Because they held the deposits of other banks, they became the lender of last resort in times of crisis. In 1913, the Federal Reserve of the United States was created with a mandate to provide a uniform and elastic currency and to serve as a lender of last resort. As they were bound by their adherence to the gold standard, price stability was their main commitment, but not the stability of the economy.
This began to change after World War I, with employment becoming a major concern. In 1931 England suspended the gold standard. Three years later, the United States revalued the metal from $20.67 an ounce to $35, allowing it to massively increase the money supply; In 1971, President Nixon ended the direct convertibility of dollars into gold and the era of fiat currency was born. Inflation gradually began to rage; it was eventually tamed by Paul Volcker’s Fed. His successor Alan Greenspan, who took office shortly before the stock market crash of October 1987, essentially expanded the goals of price stability and maximum employment set by Congress. Financial stability by default has become the third term.
Greenspan’s successors – Ben Bernanke, Janet Ellen and now Jerome Powell – accepted this. Today, central bankers do not curb stock and housing booms/bubbles, but respond quickly to recessions with plenty of cash. After the financial crisis of 2007-2008, quantitative easing – an unconventional policy using the balance sheet – became the norm. The Fed is extending its tentacles more widely. She joined the Network of Central Banks and Supervisors for Greening the Financial System, which was launched in December 2017 to develop recommendations on the role of central banks in climate change. In a subsequent Financial Stability Report, the Fed explored climate change for the first time.
Act beyond mandates
The risk is that central bankers become too dispersed. They are institutions with immense power and are likely to do their job better by staying closer to their mandate. Climate change is a noble goal, but it’s a slippery slope. Nepal Rastra Bank, the central bank of Nepal, is at risk of making this mistake. In February, it unveiled a climate risk checklist that banks and financial institutions must complete before funding any project. The global temperature is rising. An area prone to drought today could very well be flooded 20 years from now. Experts struggle to gauge the magnitude of human-induced climate change. Banks, which employ professionals to assess these risks, do not need to be told what to do.
In accordance with its mandate, the Nepal Rastra Bank Act 2002 states that (1) The objectives of the bank are: (a) To formulate and manage the monetary and exchange rate policies necessary to maintain price and balance of payments stability for the achievement of economic stability and sustainable development of the economy; (b) Strengthen public confidence in the banking and financial system by ensuring the stability of the sectors and improving access to financial services; c) Develop a safe, sound and efficient payment system. (2) The bank, without prejudice to the objectives set out in paragraph 1, shall extend its cooperation to the Government of Nepal in the implementation of economic policy.
Arguably, climate change has the potential to negatively impact economic stability; it therefore falls under the jurisdiction of the Nepal Rastra Bank. For example, during the last harvest season a year ago, yarsagumba, an expensive caterpillar mushroom harvested at high altitudes for its purported aphrodisiac properties and in high demand in China, collectors have returned empty-handed. Many livelihoods in remote districts such as Dolpa depend on this income. Last year the Yarsa was not fully mature. Lately, the Himalayan region has been regularly hit with erratic monsoons and warmer weather. Snowlines have receded and glaciers have shrunk, increasing the danger of flooding downstream.
Climate change without the fuss
For many, climate change is a given. It’s happening right in front of us. Studies have shown how reduced nitrogen oxide emissions due to Covid-19 lockdowns in the early months of 2020 apparently caused a global drop in ozone pollution. This highlights the extent of pollution generated by human industry and transportation. At the same time, global warming is a sensitive subject. Not everyone buys it. And not everyone is affected in the same way. There are zealous skeptics, as there are fanatical believers. There are scientists – including Nobel laureate Ivar Giaever – who don’t completely deny the notion of global warming, but say the data isn’t as compelling as the anti-carbon crowd would have us believe.
Unfortunately, the issue has become political. In countries like Norway, belief in climate change spans all political parties. But in the United States, it divides politically. There’s little common ground between Democrats and Republicans on what’s causing it, let alone how to fix it. Donald Trump, who has called global warming a ‘hoax’, withdrew from the Paris climate accord in 2017. Republican Trump’s Democratic successor, Joe Biden, re-engaged the United States hours after he sworn in as president in January 2021. These are the politicians who appoint officials like Fed Chairman Powell, a Republican, who joined the Central Banks and Supervisors Network for Greening the Financial System in December 2020 .
This is where the problem lies. At the risk of oversimplifying, liberals and conservatives see climate issues from different angles. A change in political leadership can therefore lead to a change in policy. Naturally, since, say, the Communist Party of Nepal (UML) and the Nepalese Congress – the two main parties in Nepal – operate under different political philosophies. Hence the need for institutions like the Nepal Rastra Bank to be able to focus on its mandate regardless of who is in power. A broader focus makes it vulnerable to political intervention. Climate change is real. At the national level, it is necessary to strike the right balance between environment and development. But that is not the job of a central bank.
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