ECB Amends Bank Capital Reviews to Reflect Extreme Weather Risks

Jerome Powell Photographer: Ting Shen/Bloomberg Photo by Ting Shen /Bloomberg

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(Bloomberg) — The European Central Bank is embedding climate risk into regular reviews of how well banks can absorb losses, marking a new chapter in its supervisory approach.

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The intention is to “incorporate, more decisively and in a more business-as-usual way, climate change and nature-related risks” in the ECB’s methodology for its so-called Supervisory Review and Evaluation Process, Patrick Amis, director general for specialized institutions and less significant institutions, said in an interview. 

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Banks’ SREP scores, which are used by the ECB to help determine individual capital needs (also known as Pillar 2 requirements), have in “a few cases” already been influenced by climate-related topics, he said, without naming the institutions affected.

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The ECB is moving faster than other central banks in treating the fallout from climate change as a financial risk that has the potential to threaten bank solvency. That’s in contrast to the Federal Reserve, with Chair Jerome Powell recently stating that climate isn’t “something that we are spending a lot of time and energy on.”

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The different approaches reflect a growing divide in the US and Europe. The Trump administration’s hostility toward climate policies has already coincided with a mass retreat by US financial institutions from net zero alliances. That in turn has triggered backlash among European asset owners worried that their US mandate holders may be ignoring climate risks.

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The development has meaningful implications for the flow of capital, with a recent report by analysts at JPMorgan Chase & Co. estimating that two-thirds of the world’s 100 largest asset owners are concerned about climate change.

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The Trump administration, meanwhile, has threatened to take retaliatory action against European environmental regulations that affect US firms. 

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The ECB is adamant that such threats won’t weaken its resolve.

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“We always go back to our mandate,” Irene Heemskerk, head of the ECB’s Climate Change Centre, said in a separate interview. “We see climate and environmental risk — regardless of any political wind that goes around — as relevant for banks to manage.” 

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Other central banks in Europe are also stepping up their climate efforts. The Bank of England has set a July 30 deadline to respond to its proposals for how banks and insurers should manage the physical and transition risks of climate change. That’s as severe weather events, which are expected to intensify, start to take their toll on banks and insurers “through direct losses and business model changes,” the BOE said.

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The ECB has been developing its climate policy over an extended period. Half a decade ago, it published a guide on climate-related and environmental risks. It has since meted out fines to banks it judges haven’t set up adequate internal controls to identify and address such threats.