ECB to carry out 'climate stress tests' on banks next year

ECB stress tests will gauge "how extreme weather events would affect banks" and how their business would be affected by a "sharp" rise in the price of carbon as a result of new environmental rules.

Vice President of the European Central Bank Luis de Guindos addresses the media after a European Union Informal Meeting of Economic and Financial Affairs Ministers in Brdo pri Kranju, Slovenia, on September 11, 2021. Picture: Jure Makovec / AFP.

FRANKFURT, Germany - The European Central Bank on Monday said it would carry out "climate stress tests" on banks between March and July next year to assess the resilience of the eurozone's financial sector to environmental shocks.

The European banking supervisor wants to "identify vulnerabilities, industry best practices and the challenges" faced by the industry, it said in a letter to lenders.

ECB stress tests will gauge "how extreme weather events would affect banks" and how their business would be affected by a "sharp" rise in the price of carbon as a result of new environmental rules.

Major eurozone banks will have to indicate to the ECB the extent to which they "rely on income from carbon-intensive industries".

The Frankfurt-based institution will also ask banks to measure the volume of CO2 emissions they "finance" through their activities.

Over the long-term, the exercise will also look at how banks will respond to costs of moving to a carbon-neutral economy in the "next 30 years", as well as assessing the risks posed by natural disasters like floods and drought.

Banks "need to act now" vice chair of the ECB's banking supervision arm Frank Elderson told journalists.

"This is a learning exercise but we all have to learn fast," Elderson said.

ECB president Christine Lagarde addressed the potential for "volatility" created by climate change in a speech on Saturday.

"As the world heats up and climatic conditions become more extreme, we will face increasingly frequent ecological shocks," Lagarde said, noting the disruption that could hit global supply chains.

Earlier this year, the ECB carried out an "economy-wide" stress test, looking at the impact of the changing climate on banks and businesses, which concluded that firms would "benefit from early adoption of green policies".

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