Climate Policy Journal’s Post

Interesting to see European Central Bank analysing climate-related transition risks, and its impact on banking capital, as a short-term risk. Vyzrd's climate data measures integrated climate risk (i.e. physical risk, transition risk and transition opportunity) which also demonstrates the short-term sensitivities to the transition risk, and crucially its impact to company cash flows and enterprise valuation. #climaterisk #sustainablefinance #sustainability #riskmanagement https://lnkd.in/eBYpVUHj

New European Central Bank paper proposes additional capital requirements to mitigate against climate risks. Regulators are increasingly recognising the importance of capital risk buffers for resilience against systemic climate risks. An ECB study by Florian Bartsch, Iulia Busies, Tina Emambakhsh, Michael Grill, Mathieu Simoens, Martina Spaggiari, and Fabio Tamburrini provides a detailed methodology for calibrating systemic risk buffers (SyRB) to address short-term transition-related climate risks in Europe. Learn more: GreenCB.co/3VSCIhk #CapitalRequirements #SystemicRiskBuffers #ECB #ClimateChange

#banks #capital #buffers #resilience #Basel #CRR #CRD #BRRD #systemic #climaterisk #scenarios #ECB #macroprudential I want to believe smart risk managers already include these scenarios in their own capital planning and allocation steering, and that banks already include them in finance contracts too. Projecting climate scenarios further on their own loan portfolio, building on the ECB's climate risk stress test they just had to do anyway. Why wouldn't they? European Banking Federation https://lnkd.in/eZaFWz4q

Well, now we are talking. ECB published a paper about a capital buffer linked with the climate risk. This may be the first steps on imposing a capital charge on banks which are not serious enough on climate. Based on the results of the paper, most of the banks would receive a SyRB (Systemic Risk Buffer) of 50bps, while the maximum a bank would receive is 200bps. Cummulated, the SyRB would equal 51 billion EUR. The study covered 107 Significant Institutions from Euro Zone, and is only looking to the transition risk. So, this is only a minimum amount. The "real" amount will be larger. The buffer is depending on the transition risk losses as percentage of RWA. #EY #ClimateRisk #Banking

#SUERFpolicybrief “Designing a macroprudential capital buffer for climate-related risks” by Florian Bartsch (Boston Consulting Group (BCG)), Iulia Busies, Tina Emambakhsh, Michael Grill, Mathieu Simoens, Martina Spaggiari, Fabio Tamburrini (European Central Bank) Climate change poses unprecedented risks to financial stability, requiring new and targeted approaches to mitigate its impact. To this end, our paper explores the design of a macroprudential capital buffer tailored to address climate-related risks, building on granular data and state-of-the-art climate stress testing methods. We first project losses due to climate transition risk by leveraging on the ECB top-down climate stress test. We document a large dispersion of banks’ exposure to transition risk, with the highest losses concentrated in the portfolios of banks characterized by lower excess capital. We then present a calibration methodology for a climate-related systemic risk buffer (SyRB), which enables to tailor bank-specific buffer requirements and to address the build-up of climate-related systemic risks in the banking sector, while limiting adverse impacts on bank lending. The focus of our application lies on transition risks, however, the flexibility of the framework allows to capture all types of climate risks in general and over different time horizons. https://lnkd.in/dviaiCj9 #MacroprudentialPolicy #ClimateChange #TransitionRisk #ClimateRisk

📜 New European Central Bank paper proposes additional capital requirements to mitigate against climate risks. ♻️ As regulators are increasingly recognising the importance of capital risk buffers for resilience against systemic climate risks, the ECB study provides a detailed methodology for calibrating systemic risk buffers (SyRB) to address short-term transition-related climate risks in Europe. 🔍 The study uses granular loan-level data to assess the exposure of 104 significant institutions across 19 Euro-area countries between 2023 and 2025. They consider both baseline and adverse macroeconomic scenarios. 📊 To avoid double counting and isolate transition-related effects, they compare results from current policy and accelerated transition scenarios. 💡 The results show that aggregate losses from an abrupt transition can be substantial, particularly for financial institutions heavily exposed to carbon-intensive sectors. Transition losses under an unanticipated accelerated transition scenario are estimated at around €52bn; reaching €72bn under adverse macroeconomic conditions. Full article here https://buff.ly/3VOSOsk #ClimateRisk #Ecb #TransitionRisk #SystemicRiskBuffer #Bank #CentralBank #CapitalRequirement #Pillar2 #Basel #Prudential #Europe

🌍 The European Central Bank's (ECB) tough stance on banks may be symbolic, but it raises important questions about gaps in holistic climate risk assessments. In the #BFSI sector, assessing climate risks is complex due to diverse lending portfolios and sector-specific nuances. Financial losses, sudden adjustments in asset values, and the increasing cost of capital are some examples of the financial implications if climate change risks are not effectively identified, measured, managed, monitored, and disclosed as per #TCFD considerations. Are we truly considering all aspects of climate risk? Key deficiencies identified by the ECB: 🔹 Incomplete Consideration of Risk Categories: Many assessments miss out on all relevant risk categories, including physical (acute & chronic) and transition (policy & legal, technology, reputation, and market risks). 🔹 Overemphasis on Transition Risks: Focusing only on transition risks (low- carbon economy), while neglecting physical risks makes difficult to prioritize acute risks (extreme weather) and chronic risks (climate change). 🔹 Net vs. Gross Risk Identification: Using a net approach instead of a gross approach by missing on the impact assessment and #doublematerilaity aspect, undermines a bank's ability to measure actual impact and plan for effective mitigation. Climate risk intersects with credit, market, and operational risks and should be integrated into an organization's overall risk management framework, not treated separately. 🌱 #ClimateRisk #RiskManagement #ESGMaterilaity Editorial Credit -The Business Times

The Federal Reserve required several large banks to conduct a pilot climate scenario exercise in September 2022. The Fed followed up in January 2023 with definitions of various physical and transition risk scenarios for each bank to run. A new BPI analysis reviews these recently released results and explains what they mean for bank risk management and the safety of the financial system. Read Gregory Hopper’s analysis that finds climate scenarios cannot create risks of sufficient magnitude that affect all asset classes simultaneously: https://lnkd.in/ec5aXK7Z #climatestresstest #stresstests #bankcapital

This is amazing news if it’s true. I’m skeptical, however. ECB researchers claim that EU banks have already reduced climate risk The European Central Bank (ECB)’s climate-related supervision has already led to an improvement in banks’ risk exposure and management, and increased capital allocation towards #GreenFinance, according to researchers at the central bank. https://buff.ly/4fhywRu #ClimateCrisis #FinTech #FinServ #Banking

Interesting report. From a #riskmanagement perspective, regional banks could be exposed to higher physical and transition risks due to geographical and industry concentration. This highlights the role of sound regulation supporting transition efforts. #climaterisk #transitionrisk #sustainability