European citizens deserve certainty that climate risk exposures are being dealt with. Signatories of the letter urged MEPs to endorse certain amendments that have been tabled across different political groups to address the climate risk exposures that we know pose a significant risk to financial stability – fossil fuel exposures.
The key proposal currently on the table to deal with these exposures is a 1250% credit risk weight for new fossil fuel exploration and expansion projects. This ‘one-for-one’ capital rule means that these exposures would be financed out of banks’ own funds (equity), with the bank assuming all of the risk associated with it.
Whilst this would be a new capital requirement on paper, it should not ever result in the need for any sound European bank to actually raise capital. It would provide a safety net against any potential reckless risk-takers, who are willing to disregard EU climate commitments and a huge level of transition and physical risk. It would also level the playing field for banks that intend to implement ambitious and credible net-zero pledges and stop financing new fossil fuel projects.