The European Central Bank’s (ECB) first major climate stress test shows that banks face a loss of 70 billion euros ($ 71 billion) if the transition to a low-carbon economy is unpredictable.
The ECB said in Frankfurt on Friday that the figure includes credit and market losses and that drought, heat and floods alone could mean a € 17 billion hit.
He warned that the finding “significantly underestimates” the real risks associated with global warming, in part because climate shocks were not accompanied by a broader economic downturn and were limited to certain portfolios.
“60% of banks are not ready for the climate risk”
The ECB also found that 60% of banks still do not have a climate risk stress test framework. Most lenders do not include climate risk in their credit risk models, and only a fifth view it as a variable when lending.
“Eurozone banks urgently need to step up their efforts to measure and manage climate risk, fill current data gaps and adopt existing best practices in the sector,” said Andrea Enria, ECB President of Supervision.
A total of 104 banks participated in the test, which presents itself as a learning exercise for both banks and regulators. The impact of the test, however, was much weaker than many banks expected and the industry is already using the results to lobby the efforts of some ECB officials keen to allocate more money to cover the institutions’ climate risks. of credit.
Bloomberg reported earlier this week that the tougher what-if scenarios being tested did not result in losses that would have created a significant dent in capital buffers at banks.
Frank Elderson, executive committee member, who serves as vice chairman of the ECB’s supervisory board, told reporters: “It is clear that climate-related risks are among our top priorities. As with many emerging risks, it takes time to properly address them and we understand that. But it is true that, like all material risks, climate-related factors will eventually be integrated into our risk-based audit approach. “
In addition, critical of banks’ ability to “barely distinguish” between various long-term climate change scenarios, Elderson said they lacked “robust strategies” beyond reducing exposure to the most polluting sectors and supporting activities to low carbon emissions.
Two-thirds of banks’ interest income comes from greenhouse gas-intensive sectors.
The ECB found that nearly two-thirds of the interest income banks receive from non-financial corporate clients come from greenhouse gas-intensive sectors, which make up 21% of high-emission sectors.
“While this is a good first step in filling data gaps, banks need to increase customer engagement to get more accurate data and insights into their customers’ transition plans,” the ECB said in a statement. It is a prerequisite for measuring and managing their situation ”.