ECB to Challenge Banks on View of Climate Risks, Elderson Says

The European Central Bank is preparing to challenge lenders in the region on their view of how much risk they face from climate change and may impose individual requirements for those found to be most exposed.

The ECB is examining assessments by 112 relevant big lenders on whether they meet expectations its supervisory watchdog set out in November, according to Frank Elderson, an executive board member at the central bank.

“Where we see that banks are not managing their exposures to climate-related risks in an adequate manner, we can and will draw on the full supervisory toolkit at our disposal to correct that situation,” he said in a speech on Thursday.

The ECB has started to incorporate climate risk into its annual review of whether banks have sufficient financial reserves to cope with potential losses. That won’t result in capital requirements for the wider industry this year, but individual firms may be held to “qualitative or quantitative requirements,” Elderson said.

President Christine Lagarde has made work on climate change a priority. Policy makers are currently working on a broad strategy review that includes whether and how monetary tools should be deployed in the climate-change battle.

While the ECB is preparing for a detailed review of banks’ climate risk next year, it’s already carrying out a stress test of how the industry could fare over the next three decades. That exercise will push banks improve their risk management and provide more data, which is currently lacking, Elderson said.

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