European banks must drastically reduce the financial risks they run as a result of climate change within two years at the latest, otherwise they risk fines and significantly higher requirements for their financial buffers. The European Central Bank (ECB) announced this on Wednesday.
With the measure, the European banking supervisor is increasing the pressure on lenders to do more to identify, limit and provide insight into the risks on their balance sheets as a result of climate change. The ECB and national banking supervisors have been pushing for this for a number of years, but according to the ECB they are not doing enough.
A “small number” of banks are therefore already required to maintain higher financial buffers, the ECB wrote on Wednesday. That’s the first time.
These types of risks include customers of banks in the fossil fuel industry, who may eventually lose their livelihoods as a result of the energy transition. Potential losses should also be considered because, for example, factories of customers who have borrowed money from the bank are affected by extreme weather.
‘Glass not even half full’
Recently, the ECB, together with national supervisors, has examined the extent to which banks in Europe have ‘climate risks’ under control. A total of 186 banks were examined. This shows that the banks are “still a long way from adequate management of climate and environmental risks,” according to the regulator.
On the website of the ECB, the Dutch board member Frank Elderson says that banks have taken the ‘first steps’, but that the pace is too slow. “The glass is slowly being filled, but it is not even half full.” The ECB found ‘blind spots’ in 96 percent of banks when it comes to identifying risks in sectors and regions where the bank is active. In 60 percent of those cases, it would be “major gaps.”
Also read: ECB: Climate change poses additional risk for businesses and banks in Southern Europe
Where banks are mapping out the risks, they often do not yet have a good idea of how great they are. And almost all bank boards are not sufficiently clear about how the risks can develop in the coming years, Elderson said. Bank bosses often do not have a clear picture of how much risk their banks can take without getting into trouble, according to the ECB.
The ECB finds that while banks’ strategies are full of references to climate change, loan and investment portfolios change little. “Most banks have not yet answered the question of what they will do with customers who may no longer have sustainable sources of income due to the green transition,” said Elderson. In other words, too many banks are still hoping for the best, but not preparing for the worst.
Finally, the supervisor writes that more than half of the banks have drawn up policy rules, but are not implementing them sufficiently. „When assessing actual [risicovolle] In some cases, however, we see that customers – even notorious polluters – are sometimes exempt from this policy.”
Elderson says certain banks have “ignored” clear warnings from their specialists. According to him, they risk “serious consequences for their balance sheet, especially if they publicly claim to be ‘green'”. The Dutch Banking Association did not respond to a request for comment.