ECB’s Buch: climate risks should be top priority for supervisors

February 23, 2024|Written by Moriah Costa|European Central Bank

Uncertainty around climate change is one of the biggest risks facing banks and supervisors should be focused on these emerging risks to ensure resilience in the banking sector, the European Central Bank’s (ECB) supervisory board chair said in her first speech earlier this month.

Claudia Buch, who was appointed to the ECB board by the European Council for a five-year term, said this uncertainty affects financial institutions and that in the long term, “banks will not be immune to risks and unexpected events”.

“Many new risks are difficult to quantify,” she said. “How can we assess the likelihood of geopolitical risks materialising? What will the impact be on an individual bank? How should we quantify the transition and physical risks of climate change?”

A lot of future uncertainty, such as questions around climate risk, can not be answered using classical risk models, Buch said. While models are the “backbone of our work”, they require “the use of scenarios, improvements in data and measurement, and a close interaction between bank-level and macro-level analysis” to measure new risks.

A recent ECB report found that most big banks in the eurozone are not decarbonising their portfolios in line with the Paris Agreement, with 90% at increased risk from the transition to a green economy.

Buch said while banks use prudential overlays to allow for more accurate models, many lack risk sensitivity. The central bank has called for banks to improve their data and risk analysis.

“Let me thus use this opportunity to remind banks and auditors to adhere to best practices on novel risks and overlays,” she added.

The ECB plans to intensify its effort to raise escalations by possibly sourcing actions and sanctions to make sure that any deficiencies are addressed. The ECB has already warned banks that they could be fined if they don’t address climate risk shortcomings.

“As supervisors, we need to focus on emerging risks and take timely action if we see weaknesses in banks’ risk controls and resilience,” Buch said.

This page was last updated February 23, 2024

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