Climate capital requirements on the way, says ECB’s Elderson

March 2, 2022|Written by Graham Caswell|European Central Bank

European Central Bank (ECB) executive board member Frank Elderson has outlined a supervisory roadmap for climate and environmental risks faced by European banks.

Speaking at an industry outreach event organised by ECB banking supervisors, Elderson said that banks should use all risk management instruments at their disposal to address these risks, including the holding of capital.

“2022 will be the year that climate and environmental risks become integrated in the day-to-day activities of our joint supervisory teams,” Elderson said. “These risks will come to form an integral part of our ongoing dialogue with supervised entities and the supervisory review and evaluation process. This will ultimately influence banks’ minimum capital requirements.”

Banks have acknowledged that transition and physical climate risks are material in both the short and long term, he accepted, while warning they remain a long way away from where they need to be. “As the findings we published last year show, banks reported that 90% of their practices are only partially or not at all in line with ECB supervisory expectations. Let me repeat: 90%.”

Elderson emphasised that the ECB is not calling for banks to divest outright from carbon-intensive activities or from geographical regions vulnerable to physical climate risk. However “we do insist that these risks are managed appropriately, just like any other risk”, he said.

Elderson added that banks can manage climate and environmental risks by realigning portfolios, setting clear risk appetites, developing mitigation strategies, adjusting qualitative credit criteria, and by quantifying and holding capital. They can also actively support their clients in mitigating and adapting to these risks.

Elderson went on to say that proposed revisions to the European Commission’s capital requirements regulation and directive will further encourage the integration of climate risks into the legal framework of banking supervision and will require banks to develop transition plans. He also added that rapid developments in disclosure frameworks and taxonomies will help close information gaps.

“On all these fronts, the sooner banks act, the smoother the transition will be for them, and for the economy they help support,” he concluded.

A Dutch lawyer and former executive director of supervision at De Nederlandsche Bank, Elderson played a key role in the creation and rapid growth of the Network for Greening the Financial System, which he chaired until earlier this year. Alongside his role on the ECB’s executive board, he is also vice-chair of its supervisory board and is also co-chair of the Task Force on Climate-related Financial Risks of the Basel Committee on Banking Supervision.

This page was last updated March 2, 2022

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