The supervision chief of the European Central Bank (ECB) has said that banks will face capital add-ons if they fail to properly manage climate risk. He warned them to act immediately rather than waiting to be coerced into doing so by regulators.
Andrea Enria used a speech in Frankfurt to reiterate the ECB’s concern over the gap between institutions’ practices and the supervisory expectations placed upon them. He echoed remarks made by governing council member François Villeroy de Galhau last week that banks could face capital add-ons if they fail to respect their climate transition plans, or if the upcoming ECB climate stress test reveals them to have serious shortcomings in their risk management and governance arrangements.
Enria expressed frustration over what he sees as a fixation on capital requirements as the solution to climate risk, rather than the comprehensive set of supervisory tools that the ECB is currently deploying. He said it creates an impression that banks would be moving to capture relevant risks if threatened by the prospect of capital add-ons. Instead, he said it is clearly in the interests of the banks, and even more so in the interests of the community they serve, to take prompt action in this area.
However, some climate advocates have expressed doubt over whether banks are likely to move quickly enough without more decisive action from regulators. Justifying its call for a ‘one for one’ capital regime – which would require banks to finance lending to new fossil fuel projects using entirely their own funds – Finance Watch has said that markets are notoriously bad at self correcting, and that there are limited incentives for banks to change their behaviour.
It was reported last week that the ECB expects to begin discussions on climate-adjusted capital rules following the conclusion of its ongoing climate stress test and thematic review. Officials warned that the process of determining the methodology is likely to be contentious, given uncertainty over the pace of warming and a scarcity of data about climate impacts on banks’ balance sheets.
This would come at the same time as the European Union moves to revise its capital requirements regulation and directive. The new regulations will further encourage the integration of climate risks into the legal framework of banking supervision and will require banks to develop transition plans.
This page was last updated March 29, 2022
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