ECB Sets Supervision of Climate Risk Management by Banks as Priority
The European Central Bank (ECB) Banking Supervision published its 2022 annual report, which sets out updated supervisory priorities for 2023-25 to address immediate risks from the current environment. In another development, the Single Resolution Board (SRB) signed cooperation arrangements with Australia, Argentina, and New Zealand regarding the exchange of information and cooperation related to bank resolution planning and how that is implemented for banks with cross-border operations.
The Annual Report presents the work of ECB Banking Supervision in the year under review as well as its updated supervisory priorities for 2023-25. During the review period, ECB focused its supervisory efforts on ensuring that banks emerge healthily from the pandemic, seize the opportunity to address structural weaknesses via effective digitalization strategies and enhanced governance, and tackle emerging risks, including climate-related and environmental risks and information technology and cyber risks. The supervisory priorities for 2023-25 mainly focuses on three different areas including strengthening resilience to the immediate consequences of macro-financial and geopolitical shocks, addressing digitalization challenges and strengthening management bodies’ steering capabilities, and stepping up efforts in addressing climate change. The key planned supervisory activities of the ECB Banking Supervision are as follows:
- Regularly monitor shortcomings in credit risk management, including bank exposures to vulnerable sectors
- Address the lack of diversification of funding sources and deficiencies in funding plans. Supervised institutions will be asked to develop, execute and adjust as needed a sound and reliable liquidity and funding plan, covering exit strategies and mitigation of rollover risks and concentrations in funding structures
- Develop and implement sound digital transformation strategies
- Review banks’ outsourcing arrangements and cybersecurity measures and conduct target reviews and on-site inspections to follow up on any identified deficiencies
- Identify and address deficiencies in management bodies’ functioning and steering capabilities, risk data aggregation and reporting
- Follow up on the deficiencies identified in the 2022 climate risk stress test and thematic review, monitoring banks’ progress and taking enforcement actions, if necessary, to ensure full alignment with its expectations by the end of 2024
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Keywords: Europe, EU, Banking, ESG, Climate Change Risk, Supervisory Priorities, Governance, IT Risk, Cyber Risk, Operational Resilience, Digitalization, Credit Risk, Liquidity Risk, Reporting, Climate Stress Test, Resolution Planning, Cross-Border Activities, SRB, ECB
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