The European Central Bank (ECB) has initiated a supervisory climate risk stress test aimed at evaluating banks’ preparedness for potential financial and economic disruptions associated with climate change.
This exercise, termed a “learning exercise,” is set to take place in the first half of 2022, with the ECB planning to release aggregate findings afterward. The test is designed to identify vulnerabilities, best practices, and the challenges that banks encounter in managing climate-related risks.
In a previous assessment, the ECB revealed notable deficiencies in EU banks’ capacities to adequately address their exposure to climate-related risks. This marked the central bank’s first extensive evaluation of how European banks are adapting their practices to manage environmental challenges. Alarmingly, none of the 112 banks surveyed met the supervisory expectations outlined by the ECB.
The upcoming stress test will concentrate on specific asset classes that are susceptible to climate risks, rather than evaluating banks’ entire balance sheets. It will assess exposures and income streams that are particularly vulnerable, merging traditional loss projections with newly collected qualitative data.
While the ECB clarifies that the stress test will not have immediate effects on banks’ capital levels, it could influence Pillar 2 requirements through adjustments in the Supervisory Risk and Evaluation Process (SREP) scores.