The ECB pardons banks after climate stress tests but imposes duties

The ECB pardons banks after climate stress tests but imposes duties

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entities they breathe easy despite the weak results of climatic stress tests because the European Central Bank (ECB) it will not impose punishments on capital for now. However, although there are no quantitative requirements, there areDuties have been imposed and internal models have been urged to review urgently. In any case, the monetary authority shows its most benevolent and accommodating face in the face of an exercise that it has insatiably described as learning. The sector feared a direct signaling and therefore Frankfurt has explicitly asked banks to keep secret individual results, even those that look good in the photo.

The Spanish bank pays attention to the silence required by the ECB, although dand unofficially some entity presumes to come out better than its competitors. In any case, the conclusions reached by the institution chaired by Christine Lagarde leave no room for festivity. They must take decisive action because could accumulate combined credit and market losses that would amount to 70,000 millions of euros if they do not adjust their frameworks in the event of a climate crisis. And the blow could be significantly greater if an economic recession is added to it.

Only two out of ten banks take climate risk into account when granting loans to clients

Around 60% of entities do not yet have a stress testing framework on climate risk. But, in addition, most of them do not even include this contingency in their credit risk models. Barely 20% take it into account as a variable when granting a loan to a client. There are no good practices in this regard and they are obliged to establish as soon as possible capacities to carry out climate resistance tests that include several channels of transmission of climate risk, such as market and credit riskseither portfolios, either in companies or in mortgage credit.

In a scene of drought and extreme heatproblems to which Spain is strongly exposed, there could be a decrease in sectoral productivity, fundamentally in the agriculture and construction, as well as an increase in credit losses in the affected areas. Similarly, in a context of heavy floodinga deterioration of real estate guarantees -that is, houses- and mortgage loans linked to these assets, as well as credit to companies.

Almost two-thirds of banking income comes from corporate clients linked to sectors that are intensive in CO2 emissions

It is also crucial that they focus on polluting companies, since almost two-thirds of its income comes from corporate clients in intensive sectors in greenhouse gas emissions. Entities often use proxy measures (proxies) to estimate their exposure to emissions-intensive sectors. This is a very weak tool, so it is iIt is important that they improve the interaction with their clients for more accurate data and information on your transition plans. this is a cfundamental condition for them to calibrate and manage their exhibition to climate risks in the future.

The results of this stress test will not be taken into account from a quantitative point of view, so the capital requirements will not be affected. The ECB points out that “this year” they will not have an impact directly through the Pillar 2 recommendations, but leaves the door open to impose penalties in subsequent exams. Of course, the ECB has set homework and the results will be taken into account in the supervisory review and evaluation process qualitative. All banks have received individual demands and the ECB expects them to take action accordingly.

The spokesman for the Spanish Banking Association (AEB), José Luis Campuzano, believes that the bank has saved the test, ensuring that they are “satisfactory” and has limited itself to pointing out that this has been an exercise in which all agents involved are learning. Along these lines, he insisted that the Spanish sector’s commitment to sustainability is evident, as reflected in the agreements signed, in the governance reinforcementsin the creation of methodologies and in accompanying clients in the transformation towards a more sustainable model.

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