Climate change can be costly – including for the financial sector. ECB Banking Supervision calls on financial institutions to make greater efforts to identify possible risks.
According to ECB supervisors, the large banks in the euro area are not adequately prepared for the billion-dollar climate risk and urgently need to make improvements.
The first climate stress test conducted by the European Central Bank (ECB) showed that financial institutions do not yet sufficiently consider the financial and economic effects of climate change in their stress tests and internal models. According to calculations, banks are threatened with losses of at least EUR 70 billion as a result of the increase in natural disasters and profound changes in many sectors as part of the transition to a greener economy.
“Eurozone banks urgently need to step up their efforts to measure and manage climate risk,” warned ECB banking director Andrea Enria, presenting on Friday a summary of the stress test results. 65 per cent of the 104 banks examined had a poor performance and, according to supervisors, had “significant constraints in their ability to perform stress tests.” The banks, however, were unable to pass the test, which was announced as an “educational exercise”. The results also have no direct impact on capital requirements.
The sum of 70 billion credit and market losses for environmental protection relates to the 41 larger banks, which also had to calculate the worst-case scenarios. It represents “only a fraction” of the real climate risk for the industry, supervisors warned. Deputy Head of ECB Banking Supervision Frank Elderson stressed in Frankfurt: “We expect banks to act decisively and develop robust stress tests in the short to medium term.”
Modeled various scenarios
For example, the test modeled that extreme heat or severe flooding would affect Europe for one year from January 1, 2022. The short-term risk of moving to a greener economy was taken as a sudden rise in the price of climate-damaging carbon dioxide (CO2) between 2022 and 2024 by around 100 dollars per ton.
The aim was to find out how such scenarios affect, for example, real estate financing. Or how great the risk is that the green transformation of the economy will cause problems for corporate customers, and this will result in losses for banks. Depending on how quickly politicians take action to slow global warming, such threats will have a greater or lesser impact. This has been modeled on a real stress test under three scenarios over a 30-year period.
“The results published today show that the banks involved do not have to expect significant losses from the stress test scenarios,” concluded Christian Ossig, CEO of the German Banking Association (BdB), on behalf of Germany. banking sector (Denmark). At the same time, five associations organized in DK declared: It remains “a constant challenge for banks and regulators to further develop methods and processes to control the risks associated with climate change”.
Climate threats are often not taken into account
Supervisors acknowledged that as of 2020, banks have made “some progress” in dealing with the risks of climate change in their business processes. However, around 60 percent of the institutions surveyed did not yet have a stress testing framework to model climate risk for their operations. Only 20 percent. takes into account climate risk when lending.
Another stress test result: Nearly two-thirds (65.2 percent) of banks’ income from operating with corporate non-financial customers comes from sectors that produce a lot of greenhouse gases. For example, these could be companies whose production depends on fossil fuels such as oil and natural gas.
Greenpeace described the test results as “terrifying”: “Many banks still underestimate the risks of the climate crisis.” By failing to prepare for climate threats, banks threatened financial stability and actively undercut climate goals.
Supervisors said it is important for institutions to obtain “more precise data and insight into their clients’ conversion plans.” “This is a prerequisite for banks to be able to assess and manage their exposure to climate risk in the future.” The test should accurately identify such weaknesses.
“The ECB’s climate stress test is a good exercise for the banking sector,” Commerzbank chief risk officer Marcus Chromik told dpa and dpa-AFX news agency. “Ultimately, however, the reduction of CO2 emissions in the customer portfolio is decisive.” The test will speed up issues such as data availability and risk methodology. “However, one thing has also become clear: everyone involved, ie supervisors, banks and companies, still has a long way to go,” said Chromik.
Karolin Kirschenmann, researcher at ZEW Mannheim, commented: “Banks can play an important role in financing the investments needed to transform the economy.” However, the financial sector cannot “step in as a substitute for the missing or unambitious climate policy.”
The ECB has been directly monitoring the largest banks in the euro area since November 2014. Currently, there are 111 institutions representing almost 82% of the total. banking market in the currency area of 19 countries. From Germany, these include: Deutsche Bank and Commerzbank, the central cooperative institute DZ Bank, the securities house of Dekabank savings banks, Aareal Bank financing real estate, Hamburger Sparkasse (Haspa) as the largest German savings bank, and state-owned banks BayernLB, LBBW and Helaba. (dpa)