Featured Product

    ECB Publishes Results of Stress Test Exercise on Climate Risk

    The European Central Bank (ECB) published results of the climate risk stress test, for 2022, among the significant institutions. The results show that banks do not yet sufficiently incorporate climate risk into their stress-testing frameworks and internal models, despite the progress made since 2020.

    The stress test, which is a part of the wider climate roadmap of ECB, was a learning exercise for both banks and supervisors to assess the sector’s preparedness for managing climate risk and identifying best practices for dealing with this risk effectively. About 104 significant banks participated in this test, which had three modules. Through these modules, banks provided information on their climate stress-testing capabilities, reliance on carbon-emitting sectors, and performance in different stress test scenarios over several time horizons:

    • The results of the first module show that nearly 60% of the banks do not yet have a climate risk stress-testing framework. Most banks do not include climate risk in their credit risk models while only 20% consider climate risk as a variable when granting loans.
    • The second module of the test found that, on aggregate, almost two-third of banks’ income from non-financial corporate customers stems from greenhouse-gas-intensive industries.
    • Under the third module, findings of the bottom-up stress test, which was limited to 41 directly supervised banks, show that the vulnerability of banks to a drought and heat scenario is highly dependent on sectoral activities and the geographic location of their exposures. In terms of long-term projections under different climate risk scenarios, the results show that an orderly green transition translates into lower losses than disorderly or no policy action. Banks lack robust strategies, other than the tendency to reduce exposures from the most polluting sectors and to support lower-carbon-emitting businesses.

    While acknowledging the many challenges banks are facing with regard to climate risk stress testing, the exercise showed that in each of the assessed areas, at least some of the banks were able to address the challenges in a satisfactory manner, suggesting that it is possible for the industry to raise the bar across all of the areas assessed. ECB also published a presentation on the results of this exercise and set out recommendations to banks. In general, ECB plans to follow up on the findings with bank-specific recommendations and guidance on best practices in climate stress testing. The main focus will be on helping banks to build their internal climate risk stress-testing frameworks and overcome the current challenges. All participating banks are expected to receive individual feedback to take action accordingly, in line with the set of best practices that ECB will publish in the final quarter of 2022.


    Related Links


    Keywords: Europe, EU, Banking, Stress Testing, Climate Change Risk, Climate Stress Test, ESG, Net Zero Transition, Lending, ECB

    Featured Experts
    Related Articles

    BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks

    The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.

    March 13, 2023 WebPage Regulatory News

    OSFI Finalizes on Climate Risk Guideline, Issues Other Updates

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.

    March 12, 2023 WebPage Regulatory News

    BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending

    BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.

    March 03, 2023 WebPage Regulatory News

    HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks

    The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.

    March 02, 2023 WebPage Regulatory News

    BCBS Report Examines Impact of Basel III Framework for Banks

    The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.

    February 28, 2023 WebPage Regulatory News

    PRA Consults on Prudential Rules for "Simpler-Regime" Firms

    Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.

    February 28, 2023 WebPage Regulatory News

    DNB Publishes Multiple Reporting Updates for Banks

    DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.

    February 28, 2023 WebPage Regulatory News

    NBB Sets Out Climate Risk Expectations, Issues Reporting Updates

    The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting

    February 24, 2023 WebPage Regulatory News

    EBA Updates Address Securitization Standards and DGS Guidelines

    The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.

    February 21, 2023 WebPage Regulatory News

    FSB Publishes Letter to G20, Sets Out Work Priorities for 2023

    The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023

    February 20, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8793