On Monday 18 December, the European Central Bank (ECB) and the European Systemic Risk Board (ESRB) published a report, drawn up with the support of the European Commission’s Joint Research Centre (JRC), on the impact of climate change on the European Union’s financial system.
The report stresses that the impact of climate-related risks on the financial stability of the real economy and the financial system depends on the interaction between exposures and financial vulnerability.
In this context, the role of banks within the financial system is crucial in addressing the risks to financial stability associated with the carbon emissions produced by the EU economy, particularly by looking at lending to sectors exposed to climate risks.
According to the report, high-emission sectors are over-represented in bank lending. In addition, the high exposure to these risks is not evenly spread across the banks.
The report also looks at the risks associated with non-bank financial intermediation.
The report presents three macroprudential frameworks to better address climate-related risks to financial stability.
This approach could complement ongoing microprudential efforts and mobilise existing European instruments.
The first framework, which is intended to be flexible and dynamic, aims to integrate climate-related risks into the standard assessments of financial stability in Europe. The report proposes ways of measuring the financial sector’s exposure to transition, market and physical risks, as well as their transmission and potential amplification. It stresses the need for indicators and milestones.
The second framework presents a strategy to combat macroprudential risks and explains how it could be implemented, building on the framework already in place in the EU.
The third framework concerns the assessment of wider risks to the nature and degradation of ecosystems and ecosystem services for the EU.
Link to the report: https://aeur.eu/f/a6e (Original version in French by Émilie Vanderhulst)