The governing council of the European Central Bank (ECB) has “strongly” welcomed European Commission proposals to incorporate environmental risks into EU banking regulation.
Part of a wide package of regulatory reforms, the proposals include empowering financial supervisors to require banks to address these risks more rapidly and effectively. They also introduce a new legal requirement for banks to prepare prudential plans to address climate-related and environmental risks arising from misalignment with EU policy targets.
The legislative package involves changes to EU capital standards through the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD), aimed at implementing the Basel 3 reforms proposed by the Basel Committee on Banking Supervision to enhance financial stability in the wake of the 2008 financial crisis. Earlier this year, both the European Parliament and the EU Council formally requested an opinion on the proposals from the ECB.
In its response, published on Thursday, the ECB expressed support for the environmental, social and governance (ESG) component of the proposed amendments. It also acknowledged the prioritisation of climate-related and environmental risks over social and governance factors. “The ECB shares the view that ESG risks can have far-reaching implications for the stability of both individual institutions and the financial system as a whole,” it said.
“It is crucial that credit institutions monitor the risk arising from the misalignment of their portfolios with the transition objectives of the EU,” the ECB made clear, calling for “ambitious and concrete timelines, including intermediate milestones, for the purpose of their strategic planning”.
Although the Basel timetable calls for the reforms to be implemented on 1 January 2023, the EU has indicated that they will not be applied until 2025, with transitional arrangements applying over a further five-year period. However the ECB does not have to wait until then to take action, with the path to climate-related systemic risk buffers already clear.
“The ECB welcomes the clarification in a recital of the proposed amendments to the CRD that the systemic risk buffer framework may already be used to address various kinds of systemic risks, including risks related to climate change,” the opinion from the governing council said. “To the extent that risks related to climate change have the potential to have serious negative consequences for the financial system and the real economy in member states, a systemic risk buffer rate can be introduced to mitigate those risks.”
Writing in the ECB’s supervision blog, executive board member Frank Elderson summarised the ECB’s opinion and welcomed the banking package. “Misalignment with the EU transition pathway leads to financial, legal and reputational risks for banks,” said Elderson, who is also vice-chair of the ECB’s supervisory board. “The revised banking package represents very good progress,” he said, while warning of continuing risk gaps in the CRR.
A recent ECB supervisory assessment revealed that no financial institution is close to fully aligning their practices with ECB supervisory expectations on climate-related and environmental risks and that institutions themselves consider 90% of their reported practices to be only partially or not at all aligned with the ECB’s supervisory expectations.
This page was last updated April 28, 2022
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