With the climate stress test, the ECB wants to determine how well the institutes are armed against the possible consequences of climate change.
(Photo: dpa)
Frankfurt Financial institutions in the euro area have to prepare much more for the financial and economic effects of climate change. This is the result of a climate stress test by the European Central Bank (ECB), the results of which were published on Friday.
“Banks in the euro area urgently need to step up their efforts to measure and manage climate risk, fill the current data gaps and adopt good practices already in place in the industry,” said ECB Chief Banking Supervisor Andrea Enria. A total of 104 banks took part in the climate stress test, the ECB’s first to date. 41 institutes were tested in special negative scenarios.
According to the results, around 60 percent of the institutes do not yet have a climate stress test framework. In addition, most institutes have not yet included climate risks in their credit risk models – only 20 percent of financial institutions consider climate risks as a factor when granting loans.
The stress test also found that in the business with corporate customers of the institutes, almost two thirds of the income comes from greenhouse gas-intensive sectors. In a third part of the stress check, banks had to calculate losses resulting from extreme weather events such as heat waves and floods and under various transition scenarios. At the 41 banks that took part, the credit and market losses added up to a total of 70 billion euros.
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“We expect banks to act decisively and develop a robust climate stress testing framework in the short to medium term,” said ECB President Frank Elderson. The financial institutions directly supervised by the ECB had to calculate how well they are prepared for financial and economic shocks from climate risks: extreme heat, severe flooding, a drastically increasing price for the emission of climate-damaging carbon dioxide (CO2).
How do such scenarios affect real estate financing? How great is the risk that the green transition of the economy will cause problems for corporate customers and result in losses for banks? Depending on how quickly politicians initiate measures to slow down global warming, risks come into play to a greater or lesser extent. This was modeled in three scenarios over a 30-year period.
Banks could not fail the climate stress test. According to the ECB banking supervisors, the results also have no direct impact on the capital requirements for the institutes.
More: Bundesbank board warns German banks: “Do not underestimate the extent of the problems”