French supervisor reports on climate risk pilot

May 10, 2021|Written by Graham Caswell|Banque de France

The French banking and insurance prudential authority has released the results of a pilot exercise in a publication analysing the impact of climate risks on the French financial system.

The stress test, which examines both physical and transition risks over a 30-year time horizon, was carried out by the Autorité de Contrôle Prudentiel et de Résolution (ACPR), a regulatory arm of the Banque de France. The assessment found an overall  “moderate” exposure of French banks and insurers to climate risks, with risk concentrated in sectors connected to fossil fuels.

However the results were released with extensive caveats, emphasising that the pilot exercise only revealed preliminary learnings. “The aim of the exercise was… to stimulate thought, analysis and promote a better integration of climate risks into risk management at firms,” Bank of France Deputy Governor Denis Beau told reporters last week, calling for banks and insurers to step up their efforts to combat climate change.

The ACPR described the stress test as “unprecedented” due to its long time horizon and use of scenario analysis and new hypotheses, and the publication itself warned that climate action is needed. “Based on the current balance sheet structures, it appears that considerable efforts must be made to help significantly reduce greenhouse gas emissions by 2050 and to contain the rise in temperature by the end of the century,” the report found, asking that the results be put into perspective as an exploratory exercise in an area of considerable uncertainty.

Despite this plea, the assessment exercise attracted strong criticism. European network Finance Watch, which recently called on EU leaders to change bank and insurance capital requirements and solvency regulations to reduce fossil fuel exposures, dismissed the results. “When the most ambitious green central bank in the world, the Banque de France, concludes from a modeling exercise that the climate crisis is no serious threat to their financial sector – you know it’s time for legislators to step in,” said Benoît Lallemand, secretary general of the network.

A network of civil society groups working on bank lending and climate change has also warned that the 30 year time horizon covered by the APCR exercise is insufficient to capture the most serious climate risks. Given the most significant consequences of climate change could happen beyond 2050, the Climate Safe Lending Network proposes that system-wide climate stress testing be expanded to include a scenario for physical risks beyond 2050, with another scenario for the transition to net-zero emissions by 2030.

The analytical framework, methodology and data used in the ACPR stress test were previously outlined by Laurent Clerc, ACPR’s Director for Research and Risk Analysis at an E-axis webinar held last November.

This page was last updated May 11, 2021

Share this article