European Central Bank Tests Climate Risk Resilience Next Year

The European Central Bank (ECB) said Monday it plans to conduct several “climate stress tests” on banks between March and July next year to assess the resilience of the euro financial zone against environmental disturbances.

European banking watchdogs want to “identify vulnerabilities, best management practices and challenges” faced by the industry, the statement said in a letter to the lender.

The ECB stress test will measure “how extreme weather events will affect banks” and how their businesses will be affected by “sharp” increases in carbon prices as a result of the new environmental regulations.

Major eurozone banks must show the ECB the extent to which they “rely on revenues from carbon-intensive industries”.

The Frankfurt-based agency will also ask banks to measure the volume of carbon dioxide (CO2) emissions that are “financed” through their activities.

Over the longer term, the exercise will also look at how banks will respond to the costs of switching to a carbon-neutral economy in the “next 30 years,” as well as assessing the risks posed by natural disasters such as floods and droughts.

Banks “need to act now” the ECB’s Deputy Head of Banking Oversight Frank Elderson told a number of reporters.

“This is an exercise in learning but we all have to learn quickly,” Elderson continued.

ECB President Christine Lagarde discussed the potential “volatility” created by climate change in a speech on Saturday (16/10).

“As the world warms and climatic conditions become more extreme, we will face more and more frequent ecological shocks,” Lagarde said, noting the disruptions that could hit global supply chains. [mg/jm]

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