EBA Consults on Role of Environmental Risks in Prudential Framework

The EBA consultation initiates the discussion on the appropriateness of the current prudential framework to address environmental risk drivers and considers the potential justification for a dedicated prudential treatment of exposures substantially associated with environmental and/or social objectives and those subject to environmental and/or social impacts. The consultation is issued in relation to the mandates in certain articles of the Capital Requirements Regulation (575/2013) and the Investment Firms Regulation (IFR or Regulation 2019/2033). EBA plans to publish the final report in 2023 and formulate its policy recommendations after considering feedback received and insights gained from available data and policy developments at the European Union and international levels. The consultation specifically:

• provides an analysis of the extent to which environmental risks are already reflected in the Pillar 1 own funds requirements via internal and external ratings, valuation of financial instruments and collateral, and scenario analysis.
• notes that the potential for the existing framework to capture environmental risks, but the way in which such risks translate into financial risks over time remains an area of significant uncertainty.
• suggests as an alternative to recognizing environmental risks within the structure of the framework, the potential introduction of specific risk-weighted adjustment factors is considered. However, it is noted that the initial analysis indicates that targeted amendments to the existing prudential requirements would address these risks more accurately than such adjustment factors, given the various challenges associated with their design and implementation.
• discusses the use of forward-looking methodologies and highlights the importance of reliable information collection environmental risks and their impact on financial losses of institutions.
• highlights the broader work of EBA in the area of environmental, social, and governance (ESG) risks, including transparency, risk management, Pillar 2 supervision, and macro-prudential capital buffers.

The ESAs' are also consulting on the draft regulatory technical standards, which lay down the content, methodologies, and presentation of principal adverse impacts on sustainability factors of the assets financed by the underlying exposures for both non-ABCP [Asset-Backed Commercial Paper] traditional securitizations and on-balance-sheet STS securitizations. The proposed standards aim to facilitate disclosures by the originators of the principal adverse impact of assets financed by STS securitizations on ESG factors. The proposed standards further aim to supplement the Single Rulebook under the Securitization Regulation, as amended by the Capital Markets Recovery Package (CMRP), and draw on the ESAs’ work in respect of sustainability-related disclosures under the Sustainable Finance Disclosure Regulation (SFDR). As required in the mandate for these draft regulatory standards, ESAs have aimed to ensure a high degree of consistency with the disclosure framework developed under SFDR and the associated regulatory technical standards. Following the consultation period, the draft standards will be finalized and submitted to the European Commission. 

Related Links

• Press Release on Environment Risks
• Discussion Paper on Environment Risks (PDF)
• Press Release on STS Securitizations
• Consultation on STS Securitizations (PDF)

Keywords: Europe, EU, Banking, STS Securitization, Basel, Regulatory Capital, Reporting, ESG, Climate Change Risk, Disclosures, Pillar 1, Regulatory Technical Standards, Securitization Regulation, SFDR, CRR, IFR, EBA, ESAs, Headline