UPDATE 2-Britain's banks face capital crackdown on climate risks

(Adds more detail)

By Huw Jones

LONDON, Oct 28 (Reuters) - The Bank of England said on
Thursday it will crack down on banks and insurers that fail to
hold enough capital to cover risks from climate-change from next
year, as it studies whether bespoke safety buffers are needed.

Climate-related financial risks are partially captured by
current frameworks, but there are gaps, the BoE said in a report
on adaption to climate change that marks a shift in thinking.

The Bank already has powers to force banks and insurers to
top up their general capital buffers if climate risks are not
sufficiently covered, and it will study whether bespoke company
and sector-wide climate buffers are also needed.

"This work will help determine whether changes to the
design, use or calibration of the regulatory capital framework
may also be needed to ensure resilience against these risks,"
the BoE said in a statement.

"We will provide an update on our approach in 2022 following
a call for further research and a conference on climate change
and capital requirements."

The BoE said in 2019 that banks and insurers should set out
by the end of 2021 how they manage risks from climate change and
disclose them.

The bank said in a report on Thursday that the firms it
regulates have made "tangible progress" in meeting these
expectations, but some are materially more advanced than others,
and the bank signalled a shift in gears next year in how it
supervises and enforces these requirements.

"As we move into 2022, the PRA will actively supervise to
ensure firms meet expectations, with firms needing to
demonstrate a good understanding and management of
climate-related financial risks on an ongoing basis," it said.

"In the report we highlight that we will consider the use of
our full supervisory and regulatory toolkit to provide the
necessary assurance or remediation where appropriate."

Enforcement can range from warnings to mandatory capital
top-ups and even fines.

Separately, the Financial Conduct Authority in its own
report said it will scrutinise how well the environmental,
social and governance (ESG) characteristics of products align
with the claims firms make on sustainability.

"Increased capital requirements for some banks and insurers
seems highly likely and enforcement action by FCA is a clear
threat," said Paul Edmondson, a financial services partner with
law firm CMS.

The global Basel Committee which writes norms on capital
requirements applied by Britain and other leading financial
centres, is due to publish an update on its own work on whether
climate buffers are needed.

The BoE, a member of Basel, is expected to be aligned with
the global work.
(Reporting by Huw Jones; Editing by Mark Potter and Jon Boyle)