ECB urges banks to factor climate risk into risk models

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ECB urges banks to factor climate risk into risk models

The European Central Bank (ECB) on Friday published the results of a climate risk stress test of major banks in the eurozone and urged them to better factor climate-related risks into their credit risk models, reported Xinhua.

The ECB explained that the climate risk stress test, the first of its kind, served as a learning exercise for both the supervisor and the banks themselves.

While confirming that considerable progress has been made, the ECB revealed that there are still deficiencies and asked banks to "make substantial further progress in the coming years."

The test found that "banks' vulnerability to a drought and heat scenario is highly dependent on sectoral activities and the geographical location of their exposures."

As part of the test, banks have been asked to provide projections of losses under different climate risk scenarios. For the 41 directly supervised banks, the combined credit and market risk losses would amount to around 70 billion euros under a short-term, three-year disorderly transition risk scenario and the two physical risk scenarios together.

The result of the stress test also indicates that an orderly phasing-in of sustainable climate policies will result in lower losses for banks than delayed and disorderly transition paths under a 30-year transition scenario, driving home the necessity for industries to make early and orderly moves in terms of climate policies.

The ECB's Governing Council has decided to take further steps to include climate change considerations in the euro system's monetary policy framework.

The ECB said it will take climate factors into consideration in its monetary policy operations.

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