ECB has banks bracing for capital hit as climate risk is tested

The European Central Bank headquarters in Frankfurt. The mass of data banks must soon submit to the ECB could be used to justify higher capital requirements as soon as next year, according to lobbyists representing the industry.

European banks are concerned that their top regulator will use its upcoming climate stress test to raise the bar for capital. The mass of data banks must soon submit to the European 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 made clear 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 Group Inc. 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 AG chief executive officer Christian Sewing calling last month for the watchdog to show “clear-sighted leadership” on the topic. 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,” 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 Bloomberg News spoke with. 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. The test “isn’t the end of the story,” Edouard Fernandez Bollo, a member of the ECB’s supervisory board, said in an interview with Revue Banque published this month. “Eventually we will have capital requirements. For example, if we have figures that are reliable and that demonstrate that banks need to set this capital aside.” One of the lobbyists said there’s concern that some regulators want to go beyond looking at how banks deal with the risks they face and use capital as a blunt instrument to try to steer banks away from lending to companies that pollute. The ECB said last month the stress test is intended to assess how prepared banks are for dealing with financial and economic shocks stemming from climate risk. The ECB isn’t alone in its efforts to address climate risk among banks. While the US has taken less action so far than its Frankfurt-based peer, the Federal Reserve said last year that it’s committed to working within its mandate to address the implications of climate change. Global financial institutions representing some 40% of worldwide assets have pledged to reduce the greenhouse gas emissions that their lending causes to zero on a net basis by 2050. Banks in Europe are most at risk of facing higher capital charges if they manage data badly and have weak governance, if the test shows they’re more vulnerable than peers or if they don’t address shortcomings, said Monsur Hussain, an analyst at Fitch Ratings. Such charges are more likely to take effect in 2023 than this year, he said.