SSM stress tests show that though banks have low exposures to flood-risk areas, some sectors are strongly impacted by a drought and heat scenario. An increase of impairments is also expected by the short-term disorderly transition scenario. This increase stem from the highest polluting sectors stroke by a steep increase in carbon prices or sectoral output losses.
When issuing the results of its thematic review, the Single Supervisory Mechanism expressed the concern that EU banks are far from adequately managing climate and environmental risks. Banks continue to underestimate the breadth and magnitude of such risks. The SSM observes that banks do not set interim targets or limits to their risk-taking to strike their long-term strategic commitments.
Stress testing exercises also showed that banks face significant challenges in terms of data availability and modelling techniques.
Learning on stress tests, supervisors acknowledge they need to further reflect on various areas (e.g., bottom-up stress scenarios, long term methodologies and means to help banks to overcome the data challenge).
Consequently, the SSM will be setting deadlines for the banks to progressively meet all the supervisory expectations it laid out.
The session will thus focus on clarifying the main lessons learned from national or EU wide stress tests and thematic reviews, and the subsequent policy priorities and challenges for both supervisors and financial institutions.
Points of discussion
- Where do we currently stand with respect to the supervision and management of sustainability risks in the European banking?
- How to make banks’ sustainability risk management practices sound, effective and comprehensive?
- Are the supervisors globally and at national levels ready to take on board sustainability risk? Are these risks already impacting banks’ minimum capital requirements? Are reliable methodologies already available to quantify these risks? What are the priorities and timetable identified by the Basel task force?