ECB climate stress test flags €70bn risk to eurozone banks

European Central Bank's initial forecast understated losses as it did not take account of indirect effects of the downturn

Fri, 08 Jul, 2022 - 16:49

Francesco Canepa

A sudden jump in carbon prices coupled with floods and droughts this year would lead to losses of at least €70bn for the eurozone's largest banks, the European Central Bank said.

The ECB said the estimate in its first climate stress test significantly understated actual losses for the 41 banks in the sample because it focused only on credit and market risk and did not take account of indirect effects such as an economic downturn.

This could soon become relevant as the eurozone struggles with drought, rising energy prices and possibly even a halt to gas supplies from Russia in the autumn in retaliation for sanctions imposed over its invasion of Ukraine.

Banks and other companies are under increasing pressure from shareholders and environmental groups to act quickly to reduce the carbon footprint of their activities.

The central bank's test also found that most eurozone banks did not have a framework for modelling climate risk and did not typically take it into account when granting loans.

"Euro area banks must urgently step up efforts to measure and manage climate risk, closing the current data gaps and adopting good practices that are already present in the sector," said the ECB's chief supervisor, Andrea Enria.

But reality could catch up with banks quickly, according to activist group Positive Money Europe. The group says it expects eurozone households to face a "triple whammy" of higher living costs, more expensive fuels and heftier mortgage payments as the ECB raises interest rates.