ECB Publishes Scenarios and Templates for Climate Risk Stress Tests
The European Central Bank (ECB) launched the supervisory climate risk stress test exercise for 2022, to assess the degree of bank preparation for dealing with financial and economic shocks stemming from climate risk. ECB has published the macro-financial scenarios and templates for this climate risk stress test exercise. The exercise will be conducted in the first half of 2022, with ECB expecting to publish the aggregate results in July 2022. The stress test will use macro-financial scenarios based on scenarios from the Network of Central Banks and Supervisors for Greening the Financial System or NGFS. These scenarios reflect possible future climate policies and assess both physical risks as well as short- and long-term risks stemming from the transition to a greener economy.
The stress test targets specific asset classes exposed to climate risk, instead of the overall balance sheets of banks. It focuses on exposures and income sources that are most vulnerable to climate-related risk, combining traditional loss projections with new qualitative data collections. The exercise consists of three distinct modules. Module 1 consists of a questionnaire designed to get an overview of the institution’s internal stress-testing capability and capacity. Module 2 focuses on two climate risk metrics, providing an insight into the sensitivity of income and exposures to transition risk. Module 3 comprises bottom-up stress testing, focusing on transition and physical risks. The macro-financial scenarios are designed exclusively to serve the purpose of Module 3 of the climate risk stress test for 2022. To ensure the proportionality of the exercise, smaller banks will not be asked to provide their own stress test projections.
From March 2022, banks will submit their climate risk stress test templates to ECB for assessment. The supervisor will subsequently engage with the banks, provide feedback, and ensure fair and consistent outcomes. The results will feed into the Supervisory Review and Evaluation Process (SREP) from a qualitative point of view. This means that this stress test could indirectly impact Pillar 2 requirements through the SREP scores, but will not directly impact capital through Pillar 2 guidance. This stress test is a learning exercise, for banks and supervisors alike, which aims to identify vulnerabilities, best practices, and challenges banks face when managing climate-related risk. The ECB climate risk stress test for 2022 will complement other ECB Banking Supervision and central banking climate-related deliverables. These include the economy-wide climate change stress test, the assessment of how banks are adjusting their practices to manage climate-related and environmental risks, and the 2022 thematic review on the incorporation of climate-related and environmental risks into the risk strategies, governance, and risk management frameworks and processes of banks.
Related Links
- Press Release
- Macro-Financial Scenarios (PDF)
- Stress Test Templates (XLSX)
- Overview of Exercise, October 2021 (PDF)
Keywords: Europe, EU, Banking, Climate Change Risk, Stress Testing, ESG, Physical Risks, Transition Risks, SREP, Pillar 2 Guidance, Pillar 2, Scenario Analysis, Basel, Headline, ECB
Featured Experts
Laurent Birade
Advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices.
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
DNB Updates List of Additional Data Requests for BanksRelated Articles
EBA Proposes Standards for IRRBB Reporting Under Basel Framework
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
FED Issues Further Details on Pilot Climate Scenario Analysis Exercise
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
