Frankfurt According to the European Banking Authority (EBA), the indirect consequences of the war in Ukraine, such as rising energy prices, are likely to weigh more heavily on European banks than the direct consequences of the conflict. German and Eastern European banks in particular are likely to feel the effects of the crisis afterwards.
“The first-round effects of the Ukraine war are not a big problem for European banks. The indirect consequences of the war, the second-round effects, are likely to hit European banks harder,” EBA Director Jacob Gyntelberg told Handelsblatt.
For him, the possible second-round effects also include “counter-sanctions from Russia” such as a delivery stop for oil and gas or delivery restrictions. “How hard this hits individual European economies depends not only on their dependence on Russian energy sources, but also on where Russian oil and gas is needed,” explained Gyntelberg.
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A sharp increase in energy prices is a problem, especially for energy-intensive heavy industry. “This particularly affects some Eastern European countries such as Hungary, Lithuania and Bulgaria, but also Germany.”
“Banks survived the stress test well”
For this reason, the conceivable burdens for the national banking systems are distributed differently. Eastern European, German and Austrian banks are particularly affected by credit risks as part of the second-round effects. “For French banks, that plays a lesser role, for Spanish and Italian banks it’s hardly an issue,” said Gyntelberg.
The banking supervisor does not expect major upheavals in the European financial system. “The economic consequences of the sanctions for the European economy, which have been predictable so far, would be easy for the European financial system to cope with.”
He justifies his assessment by saying that although experts expect significantly lower growth, these forecasts are less harsh than the scenarios that the EBA ran through in its stress test last year. “And all in all, the European banks have survived this stress test well.”
This statement also applies in the event that Russia stops its energy supplies or the EU imposes an embargo on Russian oil and gas and thus prohibits imports – which in his view would “quite likely trigger a recession”.
“The economic consequences of the sanctions for the European economy, which have been predictable so far, would be easy for the European financial system to cope with.”
(Photo: EBA)
“Although that would result in higher losses for banks, in my opinion the capital buffers of most banks are large enough for such a scenario, and that also applies to the German banking system,” said Gyntelberg. “Of course, it can always hit individual banks, but I don’t think the stability of the system is endangered even then.”
Irrespective of the burdens caused by the Ukraine war, according to Gyntelberg, “the regular EBA stress test will be held again next year”. However, the crisis scenarios would look significantly different this time, he indicated. “Rather than a low interest rate scenario, we are likely to examine the effects of a significant rise in interest rates, as well as the impact of an energy price shock and shocks to certain industrial sectors,” he said.
In the medium term, climate and environmental aspects are also to be integrated into the regular stress test. But first there should be a separate climate check: Gyntelberg announced a major joint climate stress test by the European supervisory authorities.
“In the course of 2024, we will conduct a major joint climate and environmental stress test together with the other European supervisory authorities, i.e. the insurance regulator Eiopa and the securities and investment fund regulator Esma,” he said.
The EBA is thus committing itself to a relatively ambitious timetable, because climate stress tests are a relatively new instrument for supervisory authorities, for which there is little experience and no established methods. The European Central Bank (ECB), which is currently conducting its first climate stress test among the largest banks in the euro zone, speaks of an “exercise to learn”.
The extent of the financial consequences of climate risks for banks is controversial
Gyntelberg sees no obstacle in this. “We don’t yet have a perfect, sophisticated methodology to simulate climate and environmental risks in great detail, and we also have to make some assumptions,” he admitted. Overall, however, there is a framework that allows reasonably realistic forecasts.
From his point of view, however, something else is important: “But the most important question for us is how sensitive the bank portfolios are to these risks. That’s more important than an accurate prediction of the damage,” he said.
How big the financial impact of climate risks actually is for banks is controversial. In a climate stress test in Great Britain, the results of which have not yet been published, the crisis scenarios caused only minor damage to the capital base of the institutions examined, as market participants report.
From Gyntelberg’s point of view, that doesn’t have to mean much. First, one should wait for the results of the ECB stress test, he advised. “French regulators came out with slightly more worrying results than UK authorities in a climate stress test among French banks,” he said.
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However, the French also used a longer time horizon for their stress test than the British. “Over a five-year period, there may not be such a big change, but over 30 to 40 years you can see the effects more clearly.”
In the long run, climate and environmental aspects should not only play a role in stress tests. “We are currently reviewing all regulatory instruments with a view to whether and how climate and environmental aspects can be taken more into account,” said Gyntelberg.
In May, the EBA intends to publish a discussion paper dealing with the integration of such aspects into the mandatory requirements for banks’ Tier 1 capital. Climate and environmental aspects are also to become part of risk management and the supervisory review and evaluation process that takes place annually. “By the summer of 2023, we aim to publish guidance on how sustainability risks should be addressed in risk management and capital regulations.”
More: The regulator is putting pressure on banks to become “greener”.