Eurozone banks are poorly geared up to measure the dangers of worldwide warming on their mortgage books and underestimate the losses they’re prone to endure, the European Central Bank’s debut local weather stress check has discovered.
The ECB mentioned a determine of €70bn of losses from the short-term influence of upper carbon emission costs and excessive climate occasions, put collectively by 41 of the most important banks within the foreign money bloc, “significantly understates the actual climate-related risk”.
The central financial institution mentioned a lot of these concerned within the check lacked information, had inadequate inner fashions, and the train solely lined a 3rd of their whole stability sheet exposures.
The ECB refused to offer any element on the 41 banks that produced the €70bn estimate. But the determine is dwarfed by the €25tn of belongings and €1.6tn of fairness that every one the 113 banks supervised by the central financial institution had on the finish of final 12 months.
Frank Elderson, vice-chair of the ECB supervisory board, advised reporters that banks wanted to work on their capabilities to calculate the dangers. “This was a learning exercise,” he mentioned.
The ECB is the most recent main central financial institution to evaluate the dangers of worldwide warming for banks, following comparable workout routines on the Bank of England and the People’s Bank of China over the previous 12 months. The BoE mentioned in May that UK banks and insurers that fail to handle the dangers related to local weather change may endure a ten to fifteen per cent hit to their annual earnings, with lenders’ credit score losses hovering as excessive as £225bn by 2050.
The ECB mentioned solely a fifth of all 104 banks it assessed took account of local weather change of their credit score threat fashions, two-thirds didn’t have “robust climate risk stress-testing frameworks” and most “lack relevant data”. Two-thirds of the 104 banks scored poorly of their capabilities for assessing the danger of worldwide warming.
Almost two-thirds of banks’ revenue from company clients got here from greenhouse gas-intensive industries, the ECB mentioned. In many instances exposures had been concentrated in a small variety of firms.
The Association for Financial Markets in Europe, a financial institution foyer group, acknowledged there was “much more to do” however mentioned its members had been “defining data collection templates” to shut gaps within the information they’ve on local weather dangers at company shoppers.
Campaigners criticised the central financial institution for not being robust sufficient.
Some flagged that the stress assessments didn’t bear in mind the upper value of vitality triggered by the warfare in Ukraine. “It all seems a bit anachronistic as the energy shock they are simulating is happening already,” mentioned Stan Jourdan, head of strain group Positive Money Europe.
Mauricio Vargas, finance professional at Greenpeace, blasted the train as “a toothless tiger” and mentioned it was “frightening” the diploma to which banks continued to underestimate the influence of local weather change.
Elderson acknowledged the outcomes would don’t have any direct influence on the quantity of capital banks want. But he mentioned supervisors may name for banks to set extra capital apart, beneath what is named pillar 2 steerage.
Elderson mentioned the ECB would additionally think about altering the principles for future local weather stress assessments, together with doubtlessly including a extreme financial downturn.
Even the worst-case state of affairs beneath the longer-term 30-year check included within the stress check produced losses amounting to lower than 0.2 per cent of banks’ mortgage books. Elderson mentioned this was partly as a result of banks may assume they ditched publicity to shoppers hit hardest by local weather change — not like the BoE’s check, which pressured lenders to calculate losses primarily based on the composition of their present stability sheet.
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