Featured Product

    ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations

    The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks. ECB is now setting staggered deadlines for banks to progressively meet all the supervisory expectations laid out in its guide on climate-related and environmental risks in 2020. ECB also published a compendium of good practices observed in some banks, which demonstrate that swift progress is possible and are aimed to facilitate the improvement of practices across the sector. ECB has also set institution-specific deadlines for achieving full alignment with its expectations by the end of 2024.

    The thematic review of the strategies and governance and risk management frameworks covered 107 significant banks under the direct supervision of ECB and 79 less significant banks supervised by their national authorities. ECB conducted this thematic review alongside its supervisory stress test on climate-related risks. In addition, a targeted review of commercial real estate drilled down into climate-related risks in commercial real estate portfolios. In 2022, ECB also checked banks’ management of climate-related and environmental risks through on-site inspections. It also completed a gap analysis of banks’ disclosures of climate-related and environmental risksThe thematic review aimed to check whether banks adequately identify and manage climate risks as well as environmental risks such as biodiversity loss. It also delved into banks’ risk strategies and their governance and risk management processes. The review concluded that, even if 85% of banks now have in place at least basic practices in most areas, they are still lacking more sophisticated methodologies and granular information on climate and environmental risks. There is also supervisory concern related to the execution capabilities of most banks, where effective implementation of their practices is still lagging behind. As a result, banks continue to significantly underestimate the breadth and magnitude of such risks, and almost all banks (96%) have blind spots in identifying them.

    The report on good practices follows on from the thematic review of ECB and outlines a set of 26 good practices originating from a range of institutions across various business models and sizes to meet the supervisory expectations set out in the 2020 ECB guide. The report covers observed practices related to strategy-setting, governance, risk appetite, and risk management. ECB also emphasizes the evolving nature of good practices and expects these to mature over time. This report should be read in conjunction with the ECB Guide and the prudential requirements set out in the regulatory framework and, more particularly, the Capital Requirements Regulation Directive, as further specified in the European Banking Authority guidelines.

    ECB also outlined the key timelines and steps for banks to achieve full alignment with its expectations by the end of 2024:

    • In a first step, ECB expects banks to adequately categorize climate and environmental risks and to conduct a full assessment of their impact on the bank activities by March 2023 at the latest.
    • In a second step, and at the latest by the end of 2023, ECB expects banks to include climate and environmental risks in their governance, strategy and risk management. Some banks have already started to plan for the transition to a low-carbon economy and to engage with their clients. However, a wait-and-see approach still prevails in most banks. For example, banks do not set interim targets or limits to their risk-taking with a view to fulfilling their long-term strategic commitments, or set them in such a way that the immediate impact on the bank’s business is negligible.
    • In a final step, by the end of 2024, banks are expected to meet all remaining supervisory expectations on climate and environmental risks outlined in 2020, including full integration in the Internal Capital Adequacy Assessment Process (ICAAP) and stress testing.

    The deadlines will be closely monitored and, if necessary, enforcement action will be taken. Supervisors are already including bank-specific climate and environmental findings in the Supervisory Review and Evaluation Process (SREP). ECB has imposed binding qualitative requirements on more than 30 banks in its annual SREP. Moreover, for a small number of banks, the outcome of the 2022 supervisory exercises on climate and environmental risks had an impact on their SREP scores. These, in turn, impact their Pillar 2 capital requirements.


    Related Links


    Keywords: Europe, EU, Banking, ESG, Climate Change Risk, Stress Testing, SREP, Basel, Pillar 2, CRR, ICAAP, ECB

    Featured Experts
    Related Articles

    BIS and Central Banks Experiment with GenAI to Assess Climate Risks

    A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe

    March 20, 2024 WebPage Regulatory News

    Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures

    Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.

    March 18, 2024 WebPage Regulatory News

    Singapore to Mandate Climate Disclosures from FY2025

    Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies

    March 18, 2024 WebPage Regulatory News

    SEC Finalizes Climate-Related Disclosures Rule

    The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.

    March 07, 2024 WebPage Regulatory News

    EBA Proposes Standards Related to Standardized Credit Risk Approach

    The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU

    March 05, 2024 WebPage Regulatory News

    US Regulators Release Stress Test Scenarios for Banks

    The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).

    February 28, 2024 WebPage Regulatory News

    Asian Governments Aim for Interoperability in AI Governance Frameworks

    The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.

    February 28, 2024 WebPage Regulatory News

    EBA Proposes Operational Risk Standards Under Final Basel III Package

    The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.

    February 26, 2024 WebPage Regulatory News

    EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS

    The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.

    February 23, 2024 WebPage Regulatory News

    ECB to Expand Climate Change Work in 2024-2025

    Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.

    February 23, 2024 WebPage Regulatory News
    RESULTS 1 - 10 OF 8957