Climate change may trigger demands for European banks to set aside capital   

ECB says the tests are a chance for the banks and regulator to learn about how vulnerable they are to extreme weather and tougher climate-related laws

Christine Lagarde, President of the ECB: Banks have railed against the idea of the ECB using stress test to roll out new rules to address climate risk.

European banks are concerned that the ECB will use its upcoming climate stress test to raise the bar for capital.

The mass of data banks must soon submit to the central bank could be used to justify higher capital requirements as soon as next year, according to lobbyists representing the industry. Efforts to get clarity from the ECB have been met with a degree of evasiveness, which adds to the level of anxiety, the people said, asking not to be identified discussing private talks.

In its public statements, the ECB has said that the tests are a chance for the banks and the regulator to learn about how vulnerable they are to extreme weather and to tougher climate-related laws. Individual test results won’t be made public, and the ECB has sought to reassure the industry that it will take a nuanced approach to drawing any conclusions for capital. But it has also made clear that climate change will ultimately be treated like any other risk.

“I don’t think the regulator would waste time on this if at some point it wasn’t going to evolve into a methodology for calibrating capital for banks and their distributions,” said Joseph Dickerson, an analyst at Jefferies Financial.

An ECB spokeswoman declined to comment. The exercise starts in March with aggregate results due in July. Banks have railed against the idea of the ECB using the test to roll out new rules to address climate risk, with Deutsche Bank chief executive  Christian Sewing calling last month for the watchdog to show “clear-sighted leadership” on the topic.

Capital requirements

Banks often campaign against higher capital requirements as they can reduce funds available for bonuses and investor dividends. “I hope and think that such a stress test won’t be used to change capital rules in any way,” Mr Sewing told reporters.

The ECB says the results will feed from “a qualitative point of view” into this year’s review of the risks that individual banks face. That means they could indirectly affect the capital requirements that regulators set for each bank individually on an annual basis.

That leaves room for the regulator to raise the bar for next year, according to the bank lobbyists. They’re also worried that the ECB will use the climate test results to justify a stricter approach when setting capital requirements for 2024, they said.

Comments from senior ECB officials appear to validate the banks’ longer-term concerns. 

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