Featured Product

    Pentti Hakkarainen of ECB Outlines Work Needed to Tackle Climate Risks

    September 09, 2019

    Pentti Hakkarainen of ECB spoke, at the Hannes Snellman Financial Law Seminar in Helsinki, about the climate change risks faced by banks and the work that lies ahead for regulators, supervisors, and banks. Banking supervisors must deal with the risks that climate change poses to banks and must raise awareness among banks. He suggested that the climate change risks must be better understood and ways must be found to mitigate them. He also emphasized that banks need to approach climate risks from the angle of risk management and more work needs to be done in this area.

    Mr. Hakkarainen classified the climate-related risks into physical and transition risks. Physical risks directly arise from a changing climate while the transition risks arise from the potential shift to a more sustainable economy. These risks are spread unevenly and are complex, chaotic, and non-linear. Transition risks are greater for some sectors and regions than for others. Moreover, the risks span "a very long time horizon" as these changes will happen over decades. However, the risk models used by banks and regulators cover much shorter time frames and this means that there might be blind spots. The 2019 risk map of ECB for the banking sector features, for the first time, climate risk as one of the key risks for the European banking sector. Nonetheless, more needs to be learned about these risks in terms of how to measure and  mitigate them. He also discussed the following items on the to-do list of banking supervision:

    • First, there is the issue of “green” assets. These are generating some hype and demand is growing fast. However, the definition of green assets is unclear and "a common and precise definition" is needed. EC has made a proposal on defining sustainable assets, which is now being discussed. This proposal just classifies “green” assets though. To get the full picture, “brown” assets will also need to be classified.
    • Second, climate risks need to be integrated into the supervisory framework. In this respect, EBA has the legal mandate to propose an approach. This proposal will focus on the Supervisory Review and Evaluation Process or SREP—the main tool of supervisors. Supervisors also need to think about how banks should disclose climate risks. Here, approaches differ across countries and need to be harmonized.
    • Third, coming back to “green” and “brown” assets, their respective risks need to be better understood. It is risks that determine how supervisors and regulators treat these assets. EBA will work on this over the coming years.

    These are just a few of the items on the to-do list. However, given the scope of the challenge and its complexity, no one can solve it alone. Regulators, supervisors, and central banks have joined forces in a Network for Greening the Financial System. This network comprises 42 members worldwide, including the ECB and eight observers. It is encouraging that so many institutions share a common understanding of these problems and have joined forces to come up with solutions. To understand the way banks approach climate risks, ECB recently surveyed a sample of banks. It was found that banks are very much aware of climate change. So far, they have approached the topic from the angle of corporate social responsibility, but they also see the need to approach it from the angle of risk management. In this area too, more work needs to be done.

     

    Related Link: Speech

     

    Keywords: Europe, EU, Banking, Climate Change Risk, Banking Supervision, SREP, Green Assets, EBA, ESG, ECB

    Related Articles
    News

    MAS Amends Notice 610 on Reporting Templates for Banks in Singapore

    MAS published amendments to Notices 610 and 1003 related to submission of statistics and returns, along with the reporting templates and frequently asked questions (FAQs) associated with these Notices.

    January 24, 2020 WebPage Regulatory News
    News

    HKMA Updates Policy Module on Supervisory Review Process

    HKMA is issuing, by notice in the Gazette, revised versions of two Supervisory Policy Manual modules as statutory guidelines under section 7(3) of the Banking Ordinance. The Supervisory Policy Manual modules are CA-G-5 on “Supervisory Review Process” and SB-2 on “Leveraged Foreign Exchange Trading.”

    January 24, 2020 WebPage Regulatory News
    News

    PRA Amends Pillar 2 Capital Framework for Banks

    PRA published the policy statement PS2/20 that contains the final amendments to the Pillar 2 framework and provides feedback to responses to the consultation paper CP5/19 on updates related to Pillar 2 capital framework.

    January 23, 2020 WebPage Regulatory News
    News

    FED Proposes to Revise Information Collection Under Market Risk Rule

    FED proposed to revise and extend, for three years, FR 4201, which is the information collection under the market risk capital rule.

    January 22, 2020 WebPage Regulatory News
    News

    HKMA Consults on Stay Rules on Financial Contracts Under FIRO

    HKMA published proposals for making rules related to contractual stays on termination rights in financial contracts for authorized institutions under FIRO or the Financial Institutions (Resolution) Ordinance (Cap. 628).

    January 22, 2020 WebPage Regulatory News
    News

    MAS Amends Notices on Minimum Liquid Asset Requirements for Banks

    MAS published amendments to Notices 1015, 613, and 649 related to the minimum liquid assets (MLA) requirements.

    January 21, 2020 WebPage Regulatory News
    News

    APRA Publishes Submission on Fintech and Regtech

    APRA published its submission, to the Senate Select Committee, on financial technology and regulatory technology.

    January 21, 2020 WebPage Regulatory News
    News

    OSFI to Implement Operational Risk Capital Rules for Banks in Q1 2022

    OSFI decided to move domestic implementation of the revised Basel III operational risk capital requirements from the first quarter of 2021 to the first quarter of 2022.

    January 20, 2020 WebPage Regulatory News
    News

    ECB Consults on Guideline on Threshold for Credit Obligations Past Due

    ECB published a draft guideline, along with the frequently asked questions (FAQs), on the definition of the materiality threshold for credit obligations past due for less significant institutions.

    January 20, 2020 WebPage Regulatory News
    News

    OSFI Consults on Instruction Guide for Termination of Pension Plan

    OSFI is consulting on draft revisions to the instruction guide for termination of a defined benefit pension plan.

    January 20, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 4526