ECB to fine banks that have missed climate goals

June 18, 2024|Written by |European Central Bank

Eurozone banks could be hit with fines for falling short on climate-related goals, a senior European Central Bank (ECB) supervisor said in an interview this month.

Kerstin af Jochnick, an ECB supervisory board member, told Spanish newspaper Cinco Dias that some banks have not met the ECB’s deadlines for factoring climate risk into how they do business.

“We have notified a few banks that, based on our current assessment, they have not met the interim milestones, which means they face the prospect of having to pay a so-called pecuniary penalty,” af Jochnick said. 

EU regulations require banks to assess their material risk, including ESG risk, and reflect it in their capital reserves. The ECB could issue daily fines amounting up to 5% of a bank’s daily turnover until resolved, or for up to six months. However, banks have the right to go to the  ECB first before any fine is enforced under its periodic penalty payment.

While af Jochnick did not say how many or which banks would be fined, Bloomberg first reported that the ECB “is set to take the unprecedented step of imposing fines” on “as many as four lenders.” 

“Supervisors will need to assess the documents that banks submit and the total number of days that they might have failed to comply past the deadlines we gave them,” af Jochnick said. “This will form the basis for any potential penalty, which would need to be decided upon by the supervisory board. So it’s a process that is not over yet”.

The central bank has been warning banks for more than a year that they haven’t been doing enough to account for climate risk.

ECB supervisory board Chair Claudia Buch said in a speech in early June that “almost all banks” see climate change as a material risk and “are adjusting their risk management step by step”. 

“Banks have to assess how climate-related and environmental risks affect their balance sheets,” Buch said. “As with any other type of risk, they must first identify and then manage these risks well. They must have enough capital to absorb potential losses. In other words, they need to be resilient”.

The ECB’s push for banks to account for climate risk is in stark contrast to how other central bank’s have approached climate issues. For example, while the Federal Reserve has started to implement climate stress tests, Fed chair Jerome Powell has said the central bank is not a “climate policymaker”. 

Still, some environmental advocates are sceptical that the ECB’s fines will put much pressure on banks to implement systemic change.

The fines are process-based rather than content-based, James Vaccaro, executive director at the Climate Safe Lending Network, told Green Central Banking.

Vaccaro expressed concern that as climate change gets worse and bank regulators increasingly focus on transition plans, this approach to regulation could result in more expensive credit and reduced investment in areas most impacted by climate change, creating “a doom-loop which will increase inequality and the associated macroeconomic effects of inequality.”

Vaccaro pointed to the ECB’s research on “macroprudential capital buffers”, which he says is likely to better incentivize banks because it’s “formula-driven” and not subjective. But he says the right buffer amount, starting at 50 to 100 basis points and incrementally increasing, needs to be found “so that action is taken in line with the scientific imperatives for climate goals”. 

This page was last updated June 18, 2024

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