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    ECB Issues Multiple Updates, Reviews Climate Risk Practices of Banks

    The European Central Bank (ECB) published a new framework for overseeing electronic payments, updated the list of international organizations in the form of an Annex to the AnaCredit manual, and proposed a guide for the notification of securitization transactions, with the consultation period on the guide ending on January 05, 2022. ECB also published its first large-scale assessment on the way European banks are adjusting their practices to manage climate and environmental risks, along with a related article by Frank Elderson, the Vice-Chair of the ECB Supervisory Board. The assessment reveals that banks have made efforts to meet ECB expectations on management bodies, risk appetite, and operational risk management; however, they lag behind in areas such as internal reporting, market and liquidity risk management, and stress testing.

    The assessment on bank approach to climate risk management covered 112 directly supervised banks with combined assets of EUR 24 trillion. The assessment reveals that half of the assessed banks expect climate and environmental risks to have a material impact on their risk profile in the next three to five years, with credit, operational, and business model risk being the most affected. Almost all banks have developed plans to improve their practices. However, the quality of these plans varies considerably and progress is too slow. Only one-third of banks have in place plans that are at least broadly adequate and half of the banks will not have completed the implementation of their plans by the end of 2022. On the flipside, two-third of the banks have made meaningful progress in integrating climate-related risks into their credit risk management, through measures such as enhanced due diligence procedures or new phasing-out criteria to limit financing activities highly exposed to climate-related risks. Banks are also starting to assess the energy label certifications when evaluating real estate collateral, although most banks do not yet include the results in their lending and monitoring practices.

    Post review, ECB has called on banks to address their shortcomings via individual feedback letters and, in some cases, banks will receive a qualitative requirement as part of the Supervisory Review and Evaluation Process (SREP). Supervisors are also investigating climate and environmental risk disclosures of banks. ECB expects to publish the findings in an updated report on climate and environmental disclosures in the first quarter of 2022, along with the individual feedback to the banks. As a next step, ECB plans to conduct a full review of how prepared banks are to manage climate and environmental risks, with deep dives into their incorporation into strategy, governance, and risk management. The review will take place in the first half of 2022, in tandem with the supervisory stress test on climate-related risks. Banks should expect to receive a request for information toward the end of 2021.

     

    Related Links

    Comment Due Date: January 05, 2022 (Guide)

    Keywords: Europe, EU, Banking, Climate Change Risk, ESG, AnaCredit, SREP, Reporting, Securitization Framework, Payments Framework, PMI, Basel, Disclosures, Stress Testing, Lending, ECB

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