European Central Bank (ECB): ''Banks Are Not Yet Ready''

The European Central Bank has published the results of its first major climate test. According to this report, the transition to a low-carbon economy has a negative impact on banks. It is stated that banks may face a loss of 70 billion euros.

The European Central Bank's (ECB) first major climate stress test noted that banks face a loss of 70 billion euros ($71 billion) because the transition to a low-carbon economy is unpredictable. The figure includes credit and market losses, while drought, heat and flooding alone could mean a hit of 17 billion euros, the ECB said in a statement from Frankfurt on Friday. The European Central Bank noted that 60 percent of banks do not yet have a climate risk stress testing framework in place. Most lenders do not include climate risk in their credit risk models and only one-fifth consider it as a variable when lending. "Eurozone banks should urgently step up their efforts to measure and manage climate risk, close existing data gaps and adopt good practices that are already in place in the sector," said Andrea Enria, President of the ECB's Supervisory Board. A total of 104 banks participated in the test, which was presented as a learning exercise for both banks and regulators. Yet the impact of the test has been much softer than many banks expected, and the industry is already using the results to lobby against efforts by some ECB officials eager to set aside more money to cover lenders' climate risks. "It is clear that climate-related risks are among our top priorities," Executive Board Member Frank Elderson, who serves as Vice President on the ECB's Supervisory Board, told reporters. "As with many emerging risks, addressing them appropriately takes time and we understand that. But it is also true that, like all material risks, climate-related factors will eventually be integrated into our risk-based supervisory approach." He also criticized banks for "barely distinguishing" between various long-term scenarios on climate change, adding that they lack "robust strategies" beyond reducing exposure to the most polluting sectors and supporting businesses that emit less carbon.