The European Central Bank, acting as the single supervisor for the eurozone banking union, clarified on Thursday 27 January the methodology that will be applied to the climate stress test it will conduct from March.
As indicated in October (see EUROPE 12814/19), this stress test will comprise three modules: - a questionnaire on how banks integrate climate risk into their risk management process; - a comparative analysis of banks according to several parameters (e.g. commercial revenues from polluting industries, volume of greenhouse gas emissions they finance); - a bottom-up stress test based on three scenarios in the short, medium and long term.
Targeting specific asset classes and not the entire bank balance sheet, the stress test will not include smaller banks. It will be based on macro-financial scenarios that reflect possible future climate policies and assess both physical risks (heatwave, drought, floods) and short and long-term risks arising from the transition to a greener economy.
The ECB clarifies that the results of the stress test, expected in July, will not have a direct effect on the capital of financial institutions analysed under the banking prudential rules (Pillar II).
See the stress test scenarios: https://bit.ly/3KRCnp9 (Original version in French by Mathieu Bion)