Banco de España finds ‘moderate’ short term climate risk to banks

May 16, 2022|Written by Graham Caswell|Banco de España

Climate risks will have a “moderate” impact on the Spanish banking sector in the short term, a Banco de España (BdE) analysis has found. However, that risk is unevenly distributed and increases with climatic disruption. If the physical risks associated with climate change were to materialise forcefully, the study shows, there would be “substantial long-term increases in households’ and firms’ probabilities of default”.

The analysis was included in the central bank’s latest annual report, part of a dedicated chapter focusing on the climate challenges facing the Spanish economy. The chapter includes a summary of climate science and policy responses from government, the financial sector and central banks.

A contributing study of how the Spanish banking sector can be affected by increasing CO2 emission allowance prices found only a moderate impact on the credit quality of corporate loans in the short term, with risk concentrated in sectors with higher emissions. However, increases in defaults among firms would be much sharper under a business-as-usual path to a disorderly transition.

“From a prudential standpoint, it is essential that higher capital requirements be maintained for the riskiest assets,” the BdE said. “This principle should also govern the adaptation of the regulatory framework to incorporate climate risks; that is to say, assets should be treated on the basis of their risk, with other economic policy considerations left to another type of public intervention.”

Introducing the annual report, BdE chief economist Angel Gavilan said that while they were positive in the medium term following the invasion of Ukraine would hurt in the short run, they were positive in the medium term. The energy transition risk was also expected to be inflationary in the short term, Gavilan said, calling for internationally comparable standards to accelerate the green transition.

In a separate analysis published last month, BdE researchers applied a text mining approach to the prudential reports of 106 significant European financial institutions to gauge awareness of environmental, social and governance (ESG) issues. While the study found an increased awareness of ESG risks, especially among smaller institutions, the level of detail included in the reports is generally low and superficial. Less than 20% of banks referenced the EU green taxonomy and ESG ratings that apply to their portfolio activities.

This page was last updated May 16, 2022

Share this article