The European Central Bank (ECB) published the results of the 2022 climate risk stress test of the Eurosystem balance sheet, the results of the surveys on bank lending and on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets (also known as SESFOD), and the results of its asset quality reviews (AQRs) of Crelan, Citadele banka, Goldman Sachs Bank Europe, and Morgan Stanley Europe Holding. Additionally, ECB published its first climate-related financial disclosures, welcomed the expert group report highlighting recommendations on European banking supervision, and updated the AnaCredit reporting manual annex on “List of legal forms.”
Below is a summary of the aforementioned developments:
- The results of the 2022 climate risk stress test of the Eurosystem balance sheet show that both types of climate risk—transition risk and physical risk—have a material impact on the risk profile of the Eurosystem balance sheet. The aggregate result is driven mainly by outright holdings of corporate bonds, which under all scenarios make a larger contribution to the total risk increase than the other types of financial exposures included within the scope of this exercise. The impact of transition risk, for example, is primarily concentrated in a limited number of sectors that are particularly vulnerable to climate risk (and which have, on average, a high level of emissions as a percentage of revenue), whereas the impact of physical risk is concentrated in certain geographical areas. Climate risk stress tests of the Eurosystem balance sheet are expected to be carried out on a regular basis in future. These future exercises should provide an opportunity to further enhance the methodology and expand the scope of the financial exposures covered.
- The ECB survey on credit terms and conditions covers responses received from a panel of 26 large banks, comprising 14-euro area banks and 12 banks with head offices outside the euro area. The results show that overall credit terms and conditions tightened slightly over the December 2022 to February 2023 review period for all counterparty types. The survey participants expect overall credit terms to tighten further over the review period from March to May 2023. The survey respondents reported that the maximum amount and maximum maturity of funding offered against euro-denominated securities had increased for most collateral types, but in particular for government bonds. With regard to OTC derivatives, survey respondents reported that initial margin requirements for most non-centrally cleared OTC derivatives increased in the December 2022 to February 2023 review period.
- The results of the asset quality reviews (AQRs) show that none of the four banks face any capital shortfalls, as their Common Equity Tier (CET1) ratios do not fall below the 8% threshold retained from previous exercises. The AQRs for Crelan and Citadele banka focused on credit risk while the AQRs for Goldman Sachs Bank Europe and Morgan Stanley Europe Holding focused on market risk. AQRs are a prudential, rather than an accounting, exercise and provide ECB with a point-in-time assessment of the carrying values of a bank’s assets on a particular date. The review was conducted using the latest version of the AQR methodology.
- ECB published its first climate-related financial disclosures, which provide information on the carbon footprint of its portfolios and exposure to climate risks, in addition to the climate-related governance, strategy, and risk management. The disclosures show that the corporate bonds held under the corporate sector purchase program (CSPP) and the pandemic emergency purchase program (PEPP) are on a decarbonization path in line with the goals of the Paris Agreement. The disclosures also show that the ECB has more than halved emissions from corporate and equity investments in its staff pension fund since 2019. Going forward, ECB will disclose climate-related information on these portfolios every year and will expand the scope of the disclosures to cover other monetary policy portfolios. ECB also aims to set interim decarbonization targets for its own funds portfolio and staff pension fund to stay on track with Paris Agreement goals.
- The Expert Group report found that the ECB banking supervision is now sufficiently robust and mature to make processes leaner and enhance risk-based prioritization. The report acknowledges that European banking supervision has made good progress in ensuring that banks maintain sufficient capital levels and notes that the current level of capital requirements for supervised banks looks broadly adequate. The report recommends ECB to reform risk scores and the process of determining Pillar 2 capital requirements and make full use of all the instruments in its toolbox, including impactful qualitative measures encouraging banks to tackle weak business models and governance practices. The Supervisory Board of the ECB will continue to strengthen supervisory practices and plan to evaluate the report’s input as part of a review of supervisory processes planned for 2024.
Keywords: Europe, EU, Banking, SESFOD, Basel, Regulatory Capital, Stress Testing, Climate Change Risk, ESG, Lending, Credit Risk, OTC Derivatives, AnaCredit, Q&A, Asset Quality Review, Reporting, ECB
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