New research shows world’s 60 biggest banks have $1.35 trillion USD of exposures to fossil fuel assets

Capital increase needed to reflect risk is equivalent to 3-5 months of bank profits

  • New research shows the world’s 60 largest banks have approximately $1.35 trillion USD invested in fossil fuel assets, at risk of dropping in value in the transition to net zero.
  • The calculations take credit exposures of banks to fossil fuels into account for the first time. Using data as of 31 December 2021, this number is different from previous estimates, which looked at flows of financing arranged by banks, and gives an idea of the stock of prudential risks that banks are exposed to.
  • Pan-European NGO Finance Watch argues international regulators need to take steps to shore up financial stability and protect taxpayers from shouldering the burden of bailouts by adjusting capital requirements to more accurately reflect the risks of fossil fuel financing.
  • Research finds that correcting this would require the equivalent of 3-5 months of profit per bank on average, or additional capital in the range of $157.0 billion USD to $210.2 billion USD for the world’s 60 biggest banks.

A new report by Finance Watch, the pan-European NGO dedicated to making finance serve society, reveals that the 60 largest global banks have around $1.35 trillion USD of exposures to fossil fuel assets. Fossil fuels are the main contributor to accelerating climate change, and many fossil fuel assets will need to be abandoned before the end of their economic life in the transition to a sustainable economy. In other words, they will become stranded assets and will lose their value. This will mean losses to the banks that finance such assets. Together with the damage due to catastrophic events induced by climate change, these losses might destabilise the whole financial system causing another financial crisis.

This study also shows that global banks’ exposure to fossil fuel assets alone – excluding high-emitting sectors down the chain – is almost equivalent to the exposure of the whole financial system to subprimes before the 2007-2008 global financial crisis. While fossil fuel and subprime assets present obvious structural differences, there are similarities between the situation then and now.

Benoît Lallemand, Secretary General of Finance Watch said:

“As climate-related financial risks grow with the time of inaction, their abrupt materialisation in the future will create a climate “Lehman moment”. We see a lack of responsibility throughout the system, with governments, policymakers, supervisors, rating agencies, businesses and financial institutions blaming the others for their inaction.

Just like they did leading up to the last financial crisis, these stakeholders are seeking to over-rely on measuring and modelling, which is even more delusional with climate change, a much bigger, complex risk where by definition we don’t have historic data series to rely on. In the meantime, taxpayers are virtually holding the bill.

Today, we are facing a severe cost-of-living crisis, and many people are struggling to make ends meet. While as interest rates increase, the profitability of banks is going up. In this context, it is incomprehensible that policymakers would not take a reasonable, precautionary step to protect taxpayers from climate-related financial risks”.

Currently the risks associated with fossil fuel assets are being underpriced, as regulation does not oblige banks to have sufficient funds to cover potential losses on the value of these assets. In the event of a banking crash, the burden of bank bail-outs could fall on the shoulders of taxpayers rather than being absorbed by the market. What’s more, this risk transfer acts as an “implicit subsidy”: An absence of proper regulation means financing conditions are artificially cheap, resulting in a $18 billion USD subsidy from the banking sector to the fossil fuel industry each year. This subsidy puts the financing of sustainable and transition projects at a clear disadvantage.

To help address this problem, Finance Watch is advocating for international regulators to adjust banks’ capital requirements for fossil fuel exposures, which is an important starting point to address climate-related financial risks on the balance sheets of banks. Capital requirements determine how much capacity banks have to absorb losses. At the international level, these requirements are set by the Basel Committee on Banking Supervision; at the European level, they are implemented in the Capital Requirements Regulation, which is currently under review by the legislators. According to Finance Watch, fossil fuel assets should be treated as “higher risk” assets and assigned a risk weight of 150% in line with the Basel framework.

According to new data in Finance Watch’s report, it would require between $157.0 billion USD and $210.2 billion USD in extra capital for the 60 global banks, including the 28 banks considered to be systemically important for global financial stability and the 22 largest EU banks by assets. This is equivalent to only around three months retained profits in 2021 on average. In percentage terms, this is an average capital increase of between 2.44% and 3.27% of existing capital. This adjustment to capital requirements should be phased-in over time, with supervisors working with banks to establish realistic plans. As the additional capital could be funded from profits within a relatively short space of time, the additional capital would not lead to a detrimental reduction in banks’ lending capacities.

Julia Symon, Head of Research & Advocacy at Finance Watch and co-author of the report said:

“Our study shows that increasing capital requirements for fossil fuel financing – a fundamental step in tackling climate-related risk – is a feasible measure costing on average between 3-5 months of bank profits, and this is a conservative estimate based on publicly available data for 2021.

There is also a precedent for the implementation of capital measures – the capital increases required to implement Basel reforms after the financial crisis were achieved by retaining profits, without a reduction in bank lending or asset volume.

Delivering on international climate commitments, such as the Paris Agreement, means a significant number of fossil fuel assets will become stranded. Without concrete policy action reflecting this reality, the risks of disorderly transition and climate disruptions are going to be more than the financial system can handle”.

– Ends –

Download the report: “A safer transition for fossil banking – Quantifying the additional capital needed to reflect the higher risks of fossil fuel exposures

Notes to Editors

About Julia Symon, Head of Research and Advocacy at Finance Watch

Julia Symon has extensive working experience in the banking industry. Her expertise banks’ internal controls, risk management, in particular credit risk and lending processes, capital adequacy assessment; governance, regulatory compliance, as well as custody and asset manager services.

In January 2022, Finance Watch appointed her as its Head of Research and Advocacy. She joined Finance Watch in January 2021 as a Senior Research and Advocacy officer, working on topics including CRR / CRD Capital Markets Union and Solvency II. Before then, Julia worked as an internal audit manager for two international banks – Commerzbank in Frankfurt and State Street Bank in Munich. Throughout her audit career, Julia worked on a large variety of topics, based on which she has a solid knowledge of financial regulation, banks´ organisation and processes, understanding of current developments and challenges of the banking industry and financial markets.

Julia holds a master’s degree in international economic relations with majors in financial management and international trade from the University of Konstanz, Germany, as well as the certified financial risk manager (FRM) qualification.

About Benoît Lallemand, Secretary General of Finance Watch

Secretary General of Finance Watch since January 2017, Benoît Lallemand served previously as senior policy analyst mainly covering MiFID 2, as well as senior advisor to Better Markets on EU affairs and head of strategic development and operations. He started the Citizens’ Dashboard of Finance, a platform allowing a broad range of stakeholders, including pioneers in sustainable businesses and financial services, academics and civil society organisations, to engage in a global campaign to change finance. Before joining Finance Watch upon its creation in 2011, Benoît Lallemand spent more than 10 years in the financial sector in clearing and settlement, where he held senior positions in asset-servicing departments, focusing on fixed income and structured products primary markets and regulatory reporting. He managed several business steering committees and strategic projects.

To arrange an interview with Benoît Lallemand, Secretary General of Finance Watch or Julia Symon, Head of Research & Advocacy at Finance Watch, please contact Alison Burns at alison.burns@finance-watch.org or call on +32471577233.

About Finance Watch

Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.

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