Banks in the eurozone need to prepare better in view of the looming financial risks of climate change, warned the European Central Bank (ECB) on Friday.
“Euro area banks urgently need to step up their efforts to measure and manage climate risk,’’ said Andrea Enria, Head of ECB banking supervision, presenting the results of the central bank’s first climate stress test.
Adverse scenarios could see environment-related losses for the eurozone’s financial industry reach at least 70 billion euros (71 billion dollars), the ECB calculated.
The figure relates to 41 of the 104 banks subject to the stress test, the ECB warned, meaning it reflects only a fraction of the actual climate-related risk posed to the industry.
“We expect banks to act decisively and develop robust climate stress tests in the short to medium term,’’ Frank Elderson, the ECB’s deputy head of banking supervision said.
Investigators acknowledged that banks have made some progress in addressing climate risks since 2020.
However, about 60 per cent of the institutions did not yet have a stress testing framework to model climate risk for their business.
Only 20 per cent took climate risks into account when granting loans.
On launching the test in January, the ECB’s banking supervision team said no banks would fail the test, but that it was intended as a learning exercise to assess banks’ climate-risk preparedness.
There would also be no direct capital impact on banks from the exercise.
The supervisors looked at two kinds of risk: physical risk to buildings resulting from flooding, and risk associated with restructuring the economy to low-carbon and ecologically sustainable practices, leading to direct or indirect banking losses.
The stress test is made up of three modules; a questionnaire on banks’ climate stress test capabilities and a benchmark analysis to assess the sustainability of banks’ business models.
Their exposures to emission-intensive companies; and a bottom-up stress test are also part of the modules.
Since November 2014, the ECB has been monitoring the largest banks in the eurozone.
This currently covered 111 financial institutions making up almost 82 per cent of the banking market in the 19-member single currency area. (dpa/NAN)
