DNB Issues Reporting Updates, Discusses Climate Risk Data Challenges
DNB, the central bank of Netherlands, updated the list of additional reporting requests, published the revised risk methodology for Dutch Deposit Guarantee Scheme (applicable from December 31, 2022), and set out its supervisory approach for monitoring the risk of bank overexposure in high-risk jurisdictions in context of the funding for deposits covered under the Dutch deposit guarantee scheme (DGS). DNB also decided to maintain the countercyclical capital buffer (CCyB) for banks at 1%, from May 25, 2023, and discussed the results of a study on climate risks and the need for standardized metrics in the area of biodiversity risk.
With respect to lending, transitioning to a sustainable economy presents banks with transition risks. The recently conducted DNB study analyzed the extent of these transition risks by identifying the deviation of companies in loan portfolios of Dutch banks from the transition path required to meet climate goals. Dutch banks' loan portfolios were analyzed using the Paris Agreement Capital Transition Assessment (PACTA) method, making use of two measures: the change in technology mix and the production trajectory. The study concluded that banks are exposed to transition risks because companies in their loan portfolios are not switching to low-carbon alternatives quickly enough. The results of the analysis underline how important it is for banks to pay sufficient attention to transition risks. DNB notes that it is encouraging that a large number of financial institutions have signed the Climate Commitment, and, starting in 2022, should publicly disclose what actions they are taking to help meet the goals of the Paris Agreement. Going forward, DNB will ensure that financial institutions take appropriate steps to manage sustainability risks. DNB is also strongly in favor of setting concentration limits to address climate risks.
Additionally, DNB concludes that the financial sector is exposed to risks as a result of biodiversity loss. DNB notes that the biodiversity indicators often lack transparency in how they are calculated, which reduces their practical value. As a result, indicators from different providers cannot be easily compared and sometimes even produce contradicting results. DNB has illustrated this by comparing biodiversity scores from two major data providers. DNB believes adequate pricing and management of biodiversity risks are crucial. To achieve this, the quality of the available biodiversity data must be improved. Thus, DNB urged is why we urge for the creation of more transparent and standardized biodiversity indicators at the COP15 biodiversity conference in Montreal. Biodiversity indicators must be made more transparent and further standardized. Once investors better understand how indicators are constructed, they will find them to be more informative, easier to compare and easier to apply. Further standardization of relevant indicators and biodiversity scoring methods will also enhance comparability. In addition, more forward-looking risk metrics must be developed. DNB welcomes the work of international standard-setters, such as the Taskforce on Nature-related Financial Disclosures (TNFD), which is developing a global biodiversity risk reporting methodology. As for DNB, it contributes to enhanced forward-looking metrics by conducting research on biodiversity scenarios and by driving international collaboration between central banks and supervisory authorities in this area as co-chair of the Taskforce on nature-related risks of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
Related Links
- Additional Reporting Requests (PDF)
- News on CCyB Rate
- Revision of Risk Methodology for Deposit Guarantee
- Supervisory Approach for Exposures to High-Risk Jurisdictions
- Press Release on Climate Transition Risks
- Standardization of Biodiversity Metrics and Data
Keywords: Europe, Reporting, Transition Risk, Banking, CCyB, Climate Change Risk, SREP, Lending, Netherlands, Basel, Regulatory Capital, Deposit Guarantee Scheme, Credit Risk, DNB, Biodiversity Loss
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