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    ECB Issues Supervised Entity List and Papers on Climate Risk and IFRS9

    The European Central Bank (ECB) published working papers on the impacts of climate change and IFRS 9, along with the updated list of supervised entities in the European Union. The number of supervised entities is 111 as of the January 01, 2023 cut-off date. Since the last update, names of five supervised entities have changed, license or authorization of another five entities have lapsed (thus names were deleted from the list), and certain entities have either merged into or have been acquired by the parent entity.

    The paper on climate change reviews the rapidly growing literature on the consequences of climate change and climate policies for the real economy. The paper notes that climate change will lead to permanent changes, with chief changes among these being income and growth divergence across individuals, sectors, and countries; major shifts in energy markets; increased inflation variability; stress in various financial market segments; a climate technology revolution; intensified migration flows, higher public debt; and higher likelihood of interpersonal and interstate conflict. This is subject to two sources of uncertainty. First, the effect of increasing emissions on the climate in the future resides within a wide interval of outcomes, ranging from the benign to the catastrophic. Second, the exact nature of economic transformation depends on what climate policies governments choose and on how they choose to implement them. The cost to both the real and the financial sector is lowest under an orderly transition scenario. The paper concludes that an effective and smooth transition toward a net-zero economy requires a large-scale, coordinated response between fiscal authorities, central banks, regulators, and supervisors. 

    The paper on IFRS 9 assesses the implications of the change from the incurred loss accounting under IAS 39 to the expected credit loss (ECL) accounting under IFRS 9 in the context of bank resilience and financial stability. It examines whether the conjunction of cliff-effect (refers to sudden increases in impairments) and front-loading effect (refers to the resulting effect of the earlier recognition of impairments under the ECL approach) constitutes a net benefit for financial stability compared to the former IAS 39 model. The analysis reveals that the “cliff-effect” of IAS 39 has been weakened under IFRS 9, which indicates the potential of the staging model to enhance financial stability of the banking sector in the future. It also finds that impairments grow excessively at the beginning of the adverse scenario. However, the gap between the two accounting standards narrows as time progresses. Yet another finding suggests that the procyclicality of impairments has been decreased, which in turn would benefit financial stability. While the timelier recognition of expected credit losses under the IFRS 9 approach may have positive effects on financial stability and bank resilience, not all issues of the preceding IAS 39 have been resolved. The results highlight the need to actively apply the countercyclical capital buffer (CCyB) as required under Basel III, to contain the remaining “cliff-effect” inherent in IFRS 9 during crises. Only then, the desired stabilization of the financial system will truly be achieved.

     

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    Keywords: Europe, EU, Banking, ESG, Climate Change Risk, Significant Credit Institutions, Less Significant Credit Institutions, Basel, IFRS 9, Transition Risk, Expected Credit Loss, Financial Stability, Regulatory Capital, CCyB, ECB

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