Title: ECB climate stress test flags $71 billion risk to euro zone banks(Jul 08, 2022 04:27AM ETBy

Jul 08, 2022 04:27AM ET

By: AnalysisWatch

A sudden rise in carbon prices linked to floods and droughts this year would lead to losses of at least 70 billion euros ($71.1 billion) for the eurozone's biggest banks, the European Central Bank said on Friday.

The ECB said the estimate in its first climate stress test significantly underestimated actual losses for the 41 banks studied because it focused only on credit and market risk and did not take into account indirect effects such as an economic downturn.

Banks and other companies are under increasing pressure from their shareholders and environmental groups to act quickly to reduce the carbon footprint of their activities.

The central bank's test also found that most eurozone banks did not have a framework for modelling climate risk and generally did not take it into account when lending.

The ECB said the findings had no impact on the amount of capital banks had to hold and would only feed into its supervisory work in a "qualitative way".

The ECB is conducting a separate "thematic review" to assess banks' progress in incorporating climate and environmental risks into their operations. It expects banks to meet its expectations by the end of 2024 at the latest.

The Bank of France was the first central bank to conduct a climate stress test for banks and insurers last year, followed by the Bank of England.

The Bank of England concluded that banks and insurers that fail to manage climate risks as a "first order problem" will face a 10-15% drop in annual profits and higher capital requirements.

(1 dollar = 0.9845 euro)