(Bloomberg) — European banking supervisors will begin work later this year to broaden the framework for bank capital requirements to include climate change risks. This would affect those institutes that are not preparing for potential losses from extreme weather and the clean energy transition.
Several members of the European Central Bank’s Supervisory Board expect to start discussions once the results of the ongoing climate stress test and an accompanying review are available. The methodology will likely be controversial and its discussion could stretch into next year or beyond, the people said.
The requirement that banks hold more capital based on weather risks could lead to significant tightening. The industry defends itself tooth and nail against such a project. An ECB spokesman declined to comment on the transaction.
One option would be to issue climate ratings to banks, which would feed into their respective capital requirements, according to regulators who spoke to Bloomberg. This could reflect things like the volume of loans to companies with problematic carbon footprints or the ability to identify and manage climate risks, they said.
According to supervisors, there is likely to be some discussion as to whether the new supervisory practice particularly harms banks that finance Europe’s industrial backbone. There is also concern that the institutes will no longer be able to finance homes or businesses in certain areas, such as coastal regions, he said.
More on the topic: ECB climate test less burdensome on trading books than feared
First, climate change can affect banks through events such as floods, for example, when they destroy buildings used as collateral for mortgages. On the other hand, climate change policies can economically weaken companies with higher CO2 prices or environmental regulations. The ECB has already stated that this year’s stress test will not have a direct impact on capital requirements.
Title of the article in the original:
The ECB will start work in 2022 to add climate risk to capital buffers
(Repeat from Tuesday).
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