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 Almost all European banks describe sustainability as an important concern. But when it comes to dealing with climate risks, the financial institutions still have a lot of catching up to do. This is shown by the results of the European Central Bank’s (ECB) first climate stress test.
“65 percent of all banks have performed poorly according to our rating,” said Frank Elderson, deputy head of ECB banking supervision. Most institutes have not yet included climate risks in their credit risk models, only 20 percent take them into account when granting loans.
Bundesbank board member Joachim Wuermeling made it clear that there were major differences among the participating financial institutions. “A large proportion of the major European banks are not yet looking at climate risks systematically, while others are already very progressive on the subject,” Wuermeling told Handelsblatt. “The German institutes do well overall.”
104 financial institutions took part in the ECB climate stress test, including Deutsche Bank and Commerzbank. Financial institutions could not fail the exercise, and the individual results of the banks were not published.
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However, from the point of view of the ECB’s chief banking supervisor Andrea Enria, it is clear that the financial institutions must draw conclusions. “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 the recognized practices that already exist in the industry,” said the Italian.
Greenpeace: “The results are shocking”
The ECB exercise consisted of three parts. The first examined whether banks conduct internal stress tests to measure their climate risks – 59 percent of institutions have not done so to date. The second part examined how sustainable the banks’ sources of income are. The result: almost two-thirds of the income currently comes from greenhouse-intensive sectors.
In the third part, in which only 41 banks took part, the financial institutions had to calculate the burdens they would face in various climate scenarios. In the first scenario, it was assumed that global warming would be limited to 1.5 degrees.
The middle scenario assumed that suitable political guidelines are initially lacking, but that tough cuts and rules will follow at a later point in time in order to at least achieve the two-degree target. In the third scenario, no climate protection measures were taken and the earth warmed up by three degrees. One consequence of this would be significantly more natural disasters.
In scenarios two and three, the losses at the participating banks totaled around 70 billion euros. From the point of view of the German banking industry (DK), the results show that the effects of climate risks on the banking sector are acceptable.
The ECB and experts such as Henning Dankenbring from the consulting firm KPMG, on the other hand, attribute the comparatively low burdens primarily to the exercise. “This is due to the fact that the stress test was developed before the start of the Russia-Ukraine conflict,” explained Dankenbring. The actual energy price increases since March 2022 have in some cases already exceeded the assumptions in the stress test.
Greenpeace’s Mauricio Vargas calls for the scenarios to become more realistic and the stress test more transparent. “The public needs to know how individual banks have fared.” He called the results of the exercise shocking. “Many banks continue to underestimate the risks posed by the climate crisis.”
Banks get homework from the ECB
All banks have received individual feedback from the ECB – and are now supposed to remedy the weak points. The results of the stress test have no direct impact on their capital requirements.
According to ECB controller Elderson, there could be indirect effects, after all, the results are included in the annual review of banks (SREP). If financial institutions do not do well here in categories such as business model, governance or risk management, the financial regulator can demand additional capital buffers from them.
Elderson also made it clear that the ECB is planning further climate stress tests in the future – and that these may then have a direct impact on banks’ capital requirements. Climate risks are a top priority for the ECB, Elderson said. Eventually they would be integrated into the risk-based approach of financial regulation.
From the point of view of Commerzbank risk director Marcus Chromik, the first ECB climate stress test was a good exercise for the banking sector. “But one thing has also become clear: everyone involved – i.e. supervisors, banks and companies – still have a long way to go.” The decisive factor is above all that the corporate customers of the banks reduce their CO2 emissions.
Karolin Kirschenmann from the Leibniz Center for European Economic Research (ZEW) sees politics as primarily responsible. Banks could play an important role in financing the restructuring of the economy, she said. “The financial sector can support the transformation, but cannot replace a missing or underambitious climate policy.”
More: Bundesbank board warns German banks: “Do not underestimate the extent of the problems”