ECB Publishes Scenarios and Templates for Climate Risk Stress Tests

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