UK could be facing a ‘banking crisis worse than 2008’ if City does not prepare for the collapse of fossil fuels

Climate activist groups report that the City is not prepared for the possible collapse of the value of fossil fuel assets.

Research shows that the UK could lose 500,000 jobs and have to spend £674bn to save its banks. However, the City must prepare for the collapse of fossil fuels as a result of climate crisis regulations.

The One to One campaign is a group of climate activists that published the report. It suggests that these financial repercussions could surpass those associated with the 2008 banking crisis. This forced the government to bail out major lenders like Royal Bank of Scotland and Lloyds Group. The UK spent approximately £560bn.

This illustrates the risk that banks and insurance companies will face if they fail to have enough capital to pay for the possible losses they may suffer as a result of climate regulations to reach net zero emission targets in the next years.

These regulations could make it more difficult for carbon-intensive businesses to sell products like oil or gas to customers. They will be forced to purchase greener energy instead. This will decrease the value of carbon-heavy assets, including shares or loans for fossil energy projects or related companies. This will also impact institutional investors such as banks, insurers, and fund managers who hold them.

The report suggests that global banks would need $4.9tn to bail out international banks if fossil fuel assets were to collapse in 2030. This would put 13.6 million jobs in danger.

One for One is backed by Positive Money UK and Sunrise Project. It calls for coordinated financial regulators and governments to fix the critical weaknesses in the insurance and banking sectors. To match each pound used to finance and insure fossil fuel projects, banks and insurance companies would need to have one pound of capital in reserve.

Joshua Ryan-Collins is an associate professor of economics and finance at University College London’s Institute for Innovation and Public Purpose. He stated that it would be difficult to transition to a low-carbon economy if there are no rules to ensure that fossil fuel financing is backed up by sufficient capital.

He explained that banks and insurers must have buffers to absorb shocks from the collapse in oil, gas, and coal assets. This is because new regulations kick in and demand drops as renewables increase in scale. Banks should increase capital requirements for dirty assets. This will encourage them to stop lending to unsustainable activities, which in turn will lower the transition risk.

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