Featured Product

    ACPR Releases Results of Pilot Exercise on Assessment of Climate Risks

    May 04, 2021

    ACPR published the results of its "climate pilot exercise," which assesses the financial risks associated with climate change within the banking and insurance undertakings. The exercise was conducted from July 2020 to April 2021. The pilot exercise revealed an overall "moderate" exposure of French banks and insurers to climate risks. However, this conclusion must be put into perspective in view of the uncertainties concerning both the speed and the impact of climate change. Consideration is also required with respect to the assumptions made, the scenarios analyzed, and the methodological difficulties raised by the exercise.

    The pilot exercise indicated that, based on the current balance sheet structures, considerable efforts must be made to help significantly reduce greenhouse gas emissions by 2050 and to contain the rise in temperature by the end of the century. The exposure of French institutions to the sectors most impacted by transition risk, as identified in this exercise (such as mining, refining, oil, agriculture, and construction), is relatively low. In addition, institutions tend to reduce their exposures to these sectors by 2050. However, these sectors post the highest increase in the cost of risk and probabilities of default. The pilot exercise also shows that the vulnerabilities associated with physical risk are far from negligible. Thus, on the basis of the information provided by insurers, the cost of claims could rise by a factor of 5 to 6 in certain French departments between 2020 and 2050. 

    Banks and insurers must, therefore, step up their efforts to combat climate change by integrating climate risks into their financial risk assessment process, as these efforts will contribute to the changes that will be observed in the medium and long-term. Taking better account of climate risks is indeed necessary to promote a better allocation of resources and ensure the financing of the transition. While banks and insurers seem to be generally aware of this issue, their degree of maturity remains heterogeneous and some institutions have not necessarily yet integrated the proper degree of urgency to act. This exercise also reveals a number of methodological limitations on which progress needs to be made. The following are the key improvement areas identified by ACPR:

    • Assumptions used to design the scenarios and identify sensitive sectors
    • "Physical risk" is a notable improvement area for which collective work is also needed because it implies taking into account interdependencies and a sound knowledge of the value chains, which remains largely insufficient
    • Improvement of the models used by banks and insurers

    This is the first climate exercise conducted by a supervisor based on a bottom-up approach—that is, using assessments made individually by banks and insurers based on common macroeconomic assumptions defined by ACPR. Its unprecedented nature also lies in the time horizon of the assessed risks (30 years, from 2020 to 2050, as opposed to 3 to 5 years for traditional financial stress-tests, the methodologies used, and the inclusion of both the physical and transition risks associated with climate change. To assess the financial risks associated with climate change, ACPR drew on the recommendations published by the network of central banks and supervisors for the greening of the financial system (NGFS) and used two of its transition scenarios published last June. The work of ACPR is based on an analytical framework developed specifically for this exercise, jointly with Banque de France staff. As a follow-up to this exercise, new working groups will be organized with banks and insurers and this assessment exercise will be renewed regularly. The next exercise is expected to take place in 2023 or 2024. 

     

    Related Links

    Keywords: Europe, France, Banking, Insurance, Climate Change Risk, ESG, Stress Testing, Scenario Analysis, NGFS, BDF, ACPR

    Featured Experts
    Related Articles
    News

    PRA Proposes Changes to Consolidated Prudential Rules Under CRD5/CRR2

    PRA proposed rules (in CP12/21) for the application of existing consolidated prudential requirements to financial holding companies and mixed financial holding companies that have been approved or designated in accordance with Part 12B of the Financial Services and Markets Act 2000 (FSMA).

    June 21, 2021 WebPage Regulatory News
    News

    ECB Extends Leverage Ratio Relief for Banks Until March 2022

    ECB Banking Supervision announced that euro area banks it directly supervises may continue to exclude certain central bank exposures from the leverage ratio until March 2022.

    June 18, 2021 WebPage Regulatory News
    News

    OSFI Consults on Treatment of Credit Valuation Adjustments

    OSFI decided to increase the Domestic Stability Buffer from 1.00% to 2.50% of total risk-weighted assets, with effect from October 31, 2021.

    June 18, 2021 WebPage Regulatory News
    News

    HKMA Requires Banks to Submit Plans for Fintech Adoption

    HKMA is requesting banks to participate in a tech baseline assessment, which forms part of the HKMA Fintech 2025 strategy.

    June 18, 2021 WebPage Regulatory News
    News

    OSFI Consults on Operational Risk Capital Data Management Expectations

    OSFI published two documents to consult on the management of operational risk capital data for institutions required, or for those applying, to use the Basel III standardized approach for operational risk capital in Canada.

    June 18, 2021 WebPage Regulatory News
    News

    NGFS on Addressing Financial Stability Issues from Biodiversity Loss

    The NGFS Study Group on Biodiversity and Financial Stability published a Vision paper exploring the case for action in addressing the financial stability concerns arising from biodiversity loss.

    June 18, 2021 WebPage Regulatory News
    News

    ACPR Publishes CREDITIMMO Version 2.3.0 Taxonomy for Banks

    ACPR published the final version of CREDITIMMO 2.3.0 taxonomy for the decree of October 31, 2021.

    June 18, 2021 WebPage Regulatory News
    News

    EC Prolongs Italian Guarantee Scheme for Non-Performing Loans

    EC, has approved, under the EU State Aid rules, the fourth prolongation of the Italian guarantee scheme to facilitate the securitization of non-performing loans.

    June 18, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Temporary Collateral Easing Measures

    ECB published Guideline 2021/975, which amends Guideline ECB/2014/31, on the additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral.

    June 17, 2021 WebPage Regulatory News
    News

    EIOPA Releases Report on Artificial Intelligence Governance Principles

    EIOPA published a report, from the Consultative Expert Group on Digital Ethics, that sets out artificial intelligence governance principles for an ethical and trustworthy artificial intelligence in the insurance sector in EU.

    June 17, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7128