Finance Watch calls on the ECB to issue a clearer warning against taking the results of this stress test at face value. More emphasis must be placed on the fact that this was “essentially a learning exercise” with a very constrained scope. A lack of clarity could play into the hands of those who oppose decisive action to address climate risks.
70 billion euro is the only loss number included in the report. It covers only 41 out of 104 significant banks and accounts for only one-third of their total exposures (the report does not give the share of Eurosystem banking assets which were captured by the exercise). Only losses from the three-year scenario are included. This time horizon is at odds with that of climate-change. The ECB remained silent on the estimated effects of its 30-year transition scenarios.
The most severe climate stress test scenario in the report does not include any economic downturn accompanying the negative climate effects. The world GDP features grows by 57% in 2050 compared to 2021 even in the hot house world scenario. This compares strikingly to the projections of -18% global GDP impact in the analyses done by Swiss Re.
Policymakers increasingly look for climate stress test results to drive policy implications. The signalling power of stress tests is particularly important now in the European Union, where banking prudential rules are currently under review and Members of the European Parliament are due to submit their proposals to amend the prudential rules in Capital Requirements Regulation and Directive (CRR/CRD) next week.
Julia Symon, Head of Research & Advocacy at Finance Watch said:
“Today, there are many “known unknowns”, but there are even more “unknown unknowns” when it comes to climate risk. Regulators should pay attention to the alarming insights in the ECB report, such as the fact that global systemically important banks hold the largest share of exposures to the most carbon-intensive industries. Risk concentration in the largest systemically important banks means we could end up back at the too-big-to-fail scenario once climate risks start materialising.
At the same time, I strongly caution policymakers against taking the results of this stress test at face value, especially those in the EU who are currently designing prudential measures to address climate-related risks. Work is ongoing to improve the climate stress test, but right now, it’s still very much a “learning exercise”.”