Featured Product

    Pentti Hakkarainen of ECB Outlines Work Needed to Tackle Climate Risks

    September 09, 2019

    Pentti Hakkarainen of ECB spoke, at the Hannes Snellman Financial Law Seminar in Helsinki, about the climate change risks faced by banks and the work that lies ahead for regulators, supervisors, and banks. Banking supervisors must deal with the risks that climate change poses to banks and must raise awareness among banks. He suggested that the climate change risks must be better understood and ways must be found to mitigate them. He also emphasized that banks need to approach climate risks from the angle of risk management and more work needs to be done in this area.

    Mr. Hakkarainen classified the climate-related risks into physical and transition risks. Physical risks directly arise from a changing climate while the transition risks arise from the potential shift to a more sustainable economy. These risks are spread unevenly and are complex, chaotic, and non-linear. Transition risks are greater for some sectors and regions than for others. Moreover, the risks span "a very long time horizon" as these changes will happen over decades. However, the risk models used by banks and regulators cover much shorter time frames and this means that there might be blind spots. The 2019 risk map of ECB for the banking sector features, for the first time, climate risk as one of the key risks for the European banking sector. Nonetheless, more needs to be learned about these risks in terms of how to measure and  mitigate them. He also discussed the following items on the to-do list of banking supervision:

    • First, there is the issue of “green” assets. These are generating some hype and demand is growing fast. However, the definition of green assets is unclear and "a common and precise definition" is needed. EC has made a proposal on defining sustainable assets, which is now being discussed. This proposal just classifies “green” assets though. To get the full picture, “brown” assets will also need to be classified.
    • Second, climate risks need to be integrated into the supervisory framework. In this respect, EBA has the legal mandate to propose an approach. This proposal will focus on the Supervisory Review and Evaluation Process or SREP—the main tool of supervisors. Supervisors also need to think about how banks should disclose climate risks. Here, approaches differ across countries and need to be harmonized.
    • Third, coming back to “green” and “brown” assets, their respective risks need to be better understood. It is risks that determine how supervisors and regulators treat these assets. EBA will work on this over the coming years.

    These are just a few of the items on the to-do list. However, given the scope of the challenge and its complexity, no one can solve it alone. Regulators, supervisors, and central banks have joined forces in a Network for Greening the Financial System. This network comprises 42 members worldwide, including the ECB and eight observers. It is encouraging that so many institutions share a common understanding of these problems and have joined forces to come up with solutions. To understand the way banks approach climate risks, ECB recently surveyed a sample of banks. It was found that banks are very much aware of climate change. So far, they have approached the topic from the angle of corporate social responsibility, but they also see the need to approach it from the angle of risk management. In this area too, more work needs to be done.

     

    Related Link: Speech

     

    Keywords: Europe, EU, Banking, Climate Change Risk, Banking Supervision, SREP, Green Assets, EBA, ESG, ECB

    Related Articles
    News

    ECB Amends Guideline on Temporary Collateral Easing Measures

    ECB published Guideline 2021/975, which amends Guideline ECB/2014/31, on the additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral.

    June 17, 2021 WebPage Regulatory News
    News

    EIOPA Releases Report on Artificial Intelligence Governance Principles

    EIOPA published a report, from the Consultative Expert Group on Digital Ethics, that sets out artificial intelligence governance principles for an ethical and trustworthy artificial intelligence in the insurance sector in EU.

    June 17, 2021 WebPage Regulatory News
    News

    HKMA to Increase Focus on Suptech and Regtech Cloud Adoption

    HKMA published the seventh and final issue of the Regtech Watch series, which outlines the three-year roadmap of HKMA to integrate supervisory technology, or suptech, into its processes.

    June 17, 2021 WebPage Regulatory News
    News

    EC Consults on Improving Transparency in Secondary Markets for NPLs

    EC launched a targeted consultation to improve transparency and efficiency in the secondary markets for nonperforming loans (NPLs).

    June 16, 2021 WebPage Regulatory News
    News

    BIS and Nordic Central Banks Launch Innovation Hub in Stockholm

    BIS, Danmarks Nationalbank, Central Bank of Iceland, Norges Bank, and Sveriges Riksbank launched an Innovation Hub in Stockholm, making this the fifth BIS Innovation Hub Center to be opened in the past two years.

    June 16, 2021 WebPage Regulatory News
    News

    FDIC Tech Sprint Aims to Explore Technologies to Reach Unbanked

    FDITECH, the technology lab of FDIC, announced a tech sprint that is designed to explore new technologies and techniques that would help expand the capabilities of community banks to meet the needs of unbanked individuals and households.

    June 16, 2021 WebPage Regulatory News
    News

    EC Releases Sustainable Finance Taxonomy Compass

    EC released the EU Taxonomy Compass, which visually represents the contents of the EU Taxonomy starting with the EU Taxonomy Climate Delegated Act.

    June 16, 2021 WebPage Regulatory News
    News

    FDIC Proposes Amendments to Real Estate Lending Standards

    FDIC is seeking comments on a rule to amend the interagency guidelines for real estate lending policies—also known as the Real Estate Lending Standards.

    June 15, 2021 WebPage Regulatory News
    News

    EIOPA to Consider Liquidity Risk in Stress Test for 2021

    EIOPA published its annual report, which sets out the work done in 2020 and indicates the planned work areas for the coming months.

    June 15, 2021 WebPage Regulatory News
    News

    ESRB Paper Discusses Measurement of Impact of Bank Failure via Lending

    The ESRB paper that presents an analytical framework that assesses and quantifies the potential impact of a bank failure on the real economy through the lending function.

    June 15, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7116