The European Central Bank (ECB) has launched a supervisory climate risk stress test to assess how prepared banks are for dealing with financial and economic shocks stemming from global warming.
The exercise, described as a 'learning exercise' for banks and supervisors, will be conducted in the first half of 2022 after which the ECB will publish aggregate results.
The ECB says the test aims to identify vulnerabilities, best practices and challenges banks face when managing climate-related risk.
In November last year the central bank said it had uncovered significant shortcomings in the ability of EU banks to adequately cover their exposure to climate-related risk.
In its first-ever large-scale assessment of how European banks are adjusting their practices to manage climate and environmental risks, the ECB found that not one of 112 banks surveyed have come close to meeting all supervisory expectations.
The upcoming stress test targets specific asset classes exposed to climate risk rather than banks’ overall balance sheets. It focuses on exposures and income sources that are most vulnerable to climate-related risk, combining traditional loss projections with new qualitative data collections.
Although the ECB says the test does not have direct implications for banks’ capital levels, it could indirectly impact Pillar 2 requirements through the Supervisory Risk and Evaluation Process (SREP) scores.