The ECB puts the banks Europeans to the test of climate risks with a new round of stress tests. Today the Frankfurt institute kicked off a test of supervisory stress test in order to assess the degree of preparedness of banks in dealing with economic and financial shocks deriving from climate risk.
Banks, what are climate risk stress tests
In practice, banking institutions will be subjected to various scenarios that include a green transition, a delay and the absence of policies towards sustainability goals. The exercise will be conducted in the first half of 2022, at the end of which the ECB will publish the aggregate results.
“The stress test constitutes a fact-finding exercise for both banks and supervisors – reads the ECB statement – and aims to identify the vulnerabilities, best practices and challenges that banks face in managing climate risk. It is important to underline thatand it is not aimed at promoting or rejecting banks, nor does it have direct implications for their capital levels “.
The exercise consists of three distinct modules:
- a questionnaire on the capacities of banks in the field of stress tests in the face of climate risk,
- a comparative analysis between similar entities to assess the sustainability of business models
- exposure to companies characterized by a high intensity of emissions, and finally a bottom-up stress test.
To ensure the proportionality of the exercise, smaller banks will not be asked to provide stress test projections. The test focuses on specific asset classes exposed to climate risk rather than on overall budgets of banks. It covers the exposures and sources of income most vulnerable to climate risk and combines traditional loss projections with new qualitative data collections.
The new ECB tests are looming as one of the most detailed exercises on climate risk, and will also include the impact of elements such as higher emission prices or the impact of home energy efficiency on the mortgage market.
Climate risk risks halving the value of homes
Speaking of the real estate sector, some previews have arrived in recent days from Bloomberg. In this sector, what is most worrying are the physical risks, he has declared Fernando de la Mora, managing director of Alvarez & Marsal, who is working with lenders to guide them through the requirements set out in the stress tests.
Let’s take the case of floods. For real estate assets at high risk of flooding, the ECB assumes a decline of up to 45% in value. The drought scenario, on the other hand, is “more manageable” and has an economic impact due to lower productivity. Only southern European countries experience severe GDP shocks in climate-related sectors, such as agriculture.