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

    EBA Finalizes Templates for One-Off Climate Risk Scenario Analysis

    The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.

    November 28, 2023 WebPage Regulatory News

    EBA Mulls Inclusion of Environmental & Social Risks to Pillar 1 Rules

    The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.

    October 31, 2023 WebPage Regulatory News

    BCBS Consults on Disclosure of Crypto-Asset Exposures of Banks

    As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.

    October 19, 2023 WebPage Regulatory News

    BCBS and EBA Publish Results of Basel III Monitoring Exercise

    The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.

    October 18, 2023 WebPage Regulatory News

    PRA Updates Timeline for Final Basel III Rules, Issues Other Updates

    The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.

    October 18, 2023 WebPage Regulatory News

    US Treasury Sets Out Principles for Net-Zero Financing

    The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.

    October 17, 2023 WebPage Regulatory News

    EC Launches Survey on G7 Principles on Generative AI

    The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.

    October 14, 2023 WebPage Regulatory News

    ISSB Sustainability Standards Expected to Become Global Baseline

    The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.

    September 18, 2023 WebPage Regulatory News

    IOSCO, BIS, and FSB to Intensify Focus on Decentralized Finance

    Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.

    September 18, 2023 WebPage Regulatory News

    BCBS Assesses NSFR and Large Exposures Rules in US

    The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.

    September 14, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8938