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ECB stress test shows most banks don’t include climate risk in credit models


Environmental protesters take to the streets during a Friday for Future rally in the financial district of Frankfurt, Germany, last August.

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The European Central Bank’s first climate risk stress test results show that most banks do not fully incorporate climate risks into their internal model and stress test frameworks. .

In a report released Friday, the ECB said the findings reaffirm the view that banks must increase their focus on climate risks.

Andrea Enria, chair of the ECB’s supervisory board, said: “Eurozone banks must urgently step up efforts to measure and manage climate risks, closing the current data gap and apply good practices already in the field”.

The ECB said a total of 104 banks participated in the trial, the first of its kind, providing information on three modules or categories. These include the ability to test their own climate stress; their dependence on carbon emission sectors; and their performance in different situations over a wide range of time periods.

The results of the first module show that about 60% of banks do not yet have a climate risk stress testing framework.

Similarly, the ECB said most banks do not include climate risk in their credit risk models, and only 20% consider climate risk as a variable when granting loans.

As for banks’ reliance on carbon-emitting sectors, the ECB said overall, almost two-thirds of banks’ income from non-financial corporate clients comes from gas-intensive industries. Greenhouse.

In many cases, the report shows that banks’ “funded emissions” come from a small number of large partners, which increases their exposure to emissions-intensive sectors. .

In the third module, the results were limited to 41 banks that were directly supervised to ensure comparability with smaller banks. It requires project lenders to damage during extreme weather events under different transition scenarios.

The results warn that total credit and market losses could amount to around 70 billion euros ($70.6 billion) this year for 41 banks with direct supervision.

However, the ECB notes that this “significantly underestimates the actual climate-related risk” as it reflects only a small fraction of the actual danger. This is partly due to the scarcity of available data.

“This exercise is an important milestone on our path to making our financial system more resilient to climate risks,” said Frank Elderson, vice president of the ECB’s supervisory board. “. “We expect banks to take decisive action and develop robust climate stress testing frameworks in the short to medium term.”

ECB President Christine Lagarde previously said the central bank was taking steps to bring climate change “into our monetary policy operations.”

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The ECB said it has collected both qualitative and quantitative information, to assess the sector’s readiness to respond to climate risks and to gather best practices for dealing with climate-related risks. Queen.

The report concludes that most banks will need to do more to improve their governance structures, data availability, and modeling techniques for their stress-testing frameworks.



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