Featured Product

    ESRB Report Identifies Data Gaps in Measurement of Climate Change Risk

    ESRB published a report that explores the quantitative perspectives on financial stability risks stemming from climate change and examines how the information gap can be filled for the euro area and EU member states. The report proposes foundations for the required risk monitoring, along with the initial elements underpinning a pilot risk assessment framework for banks and insurers. The report also highlights that the ongoing health pandemic has brought the prospect of large shocks to our collective attention and has laid bare the need for timely information as the shock evolves. Considering this need, the report also identifies areas where further work is needed to improve measurement, thus enabling a more complete evaluation of the risks associated with climate change.

    The report draws insights from granular supervisory datasets based on available carbon emissions reporting and makes use of existing economic and financial models to gauge potential near-term risks. While climate change reporting by banks and firms alike remains patchy, available datasets and methodologies nonetheless already shed considerable light on financial stability risk exposures. The report outlines the evidence on costs of climate change and examines whether financial markets are pricing climate-related shocks or building capacity to do so in the future. It then discusses financial-sector exposures and presents details on the forward-looking scenario analysis and the foundations of an exploratory pilot risk assessment framework. The following are the key findings of the analysis:

    • Costs associated with climate change appear inevitable. There will either be physical costs resulting from an insufficiency (or lack of timeliness) of mitigating action or transition costs from stringent action—or both.
    • Financial markets only price risk in a limited way. Despite the incomplete, inconsistent, and insufficient data, green capacity is building rapidly in bond, equity, and emissions trading.
    • Drawing on the available supervisory reporting of large exposures of banks, the analysis concludes that direct exposures of European financial institutions to CO2-intensive sectors appear to be limited and falling moderately on average, but with tail risk in the form of concentrated exposures in a few sectors and firms.
    • With respect to the forward-looking exploratory scenario analysis, a review of the transition risk scenarios suggests that costs, to the economic or banking sector, of even a sharp rise in carbon pricing or marked industrial shifts over a five-year timeframe are likely to be contained and lower than for the potential losses due to physical risks resulting from climate change. The forward-looking exploratory scenario analysis builds on the methodology developed by DNB and in the ECB banking sector euro area stress test (BEAST) banking model.

    Regardless of the foundations that this report provides for better understanding financial stability risks arising from climate change, further work is needed for more accurate and encompassing measurement of the risks to financial stability. Data gaps constrain a fully representative analysis while disclosures remain incomplete, inconsistent, and insufficient. Due to their voluntary nature, firm disclosures of climate metrics remain partial and incomplete amid likely selection bias and are, therefore, not representative of the broader industrial sample of polluting firms. Inconsistency relates to the potential for “greenwashing,” with an inadequate accreditation for green labeled products in the absence of a widely accepted benchmark taxonomy. Insufficiency relates mainly to the downstream emission intensity of the products of portfolios, which are rarely reported in a consistent manner. Additionally, disclosures of financial institutions—notably banks—fail to encompass the climate risk inherent in their asset portfolios. Newly available credit register information might help to fill gaps.

    Financial-sector exposures and vulnerabilities to climate change currently involve an eclectic collection of existing supervisory data, market data sources and other data. As a way forward, once more comprehensive granular data are available, the opportunities created as a result, for example from credit registers, should be explored. Climate risk measurement could also be improved. Additional data collections may be needed to supplement existing firm disclosures, which are patchy and at times heterogeneous. With regard to methodological investments, more climate-specific modeling (including long-term stress testing for banks and insurers) is needed. Ultimately, analysis of systemic risks from climate change should provide the foundations for evidence-based macro-prudential policy reflections. At a minimum, further work is needed to better frame disclosure needs to help address informational market failures associated with climate-change risk, thus providing a basis for effectively addressing the allocative market failures associated with climate change.

     

    Related Link: Report (PDF)

     

    Keywords: Europe, EU, Banking, Insurance, Securities, Climate Change Risk, Financial Stability, ESG, Sustainable Finance, Systemic Risk, Stress Testing, Disclosures, Reporting, Basel, ECB, ESRB

    Featured Experts
    Related Articles
    News

    PRA and FPC Finalize Changes to Leverage Ratio Framework in UK

    The Prudential Regulation Authority (PRA) published the final policy statement PS21/21 on the leverage ratio framework in the UK. PS21/21, which sets out the final policy of both the Financial Policy Committee (FPC) and PRA

    October 08, 2021 WebPage Regulatory News
    News

    CFPB Proposes Rule on Small Business Lending Data Collection

    The Consumer Financial Protection Bureau (CFPB) proposed to amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) under Section 1071 of the Dodd-Frank Act.

    October 08, 2021 WebPage Regulatory News
    News

    PRA Decides to Maintain O-SII Buffers for Another Year

    The Prudential Regulation Authority (PRA) decided to maintain, at the 2019 levels, the buffer rates for the Other Systemically Important Institutions (O-SII) for another year, with no new rates to be set until December 2023.

    October 08, 2021 WebPage Regulatory News
    News

    FSB Report Assesses Implementation of Recommendations on Stablecoins

    The Financial Stability Board (FSB) published a progress report on implementation of its high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements.

    October 07, 2021 WebPage Regulatory News
    News

    APRA Updates Loan Serviceability Expectations for Home Lending

    In a letter to the authorized deposit taking institutions, the Australian Prudential Regulation Authority (APRA) announced an increase in the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.

    October 06, 2021 WebPage Regulatory News
    News

    CPMI and IOSCO Consult on Guidance on Stablecoin Arrangements

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are consulting on the preliminary guidance that clarifies that stablecoin arrangements should observe international standards for payment, clearing, and settlement systems.

    October 06, 2021 WebPage Regulatory News
    News

    EBA and EIOPA Set Out Work Priorities for 2022

    The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) have set out their respective work priorities for 2022.

    October 05, 2021 WebPage Regulatory News
    News

    MFSA Issues Reporting Updates and Guidance for Banks

    The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0, in addition to the reporting module on leverage under the common reporting (COREP) framework.

    October 05, 2021 WebPage Regulatory News
    News

    EC Publishes Decision on List of Equivalent Third Countries Under CRR

    The European Commission (EC) published the Implementing Decision 2021/1753 on the equivalence of supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures, in accordance with the Capital Requirements Regulation or CRR (575/2013).

    October 04, 2021 WebPage Regulatory News
    News

    EC Rule on Contractual Recognition of Write-Down and Conversion Powers

    EC published the Implementing Regulation 2021/1751, which lays down implementing technical standards on uniform formats and templates for notification of determination of the impracticability of including contractual recognition of write-down and conversion powers.

    October 04, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7552