ECB publishes report on climate stress testing

The ECB has published the results of its 2022 climate stress test, which has helped banks to develop climate risk-related stress testing capabilities.

The report highlights both physical and transition risks which should be covered in test scenarios, and that banks with more advanced approaches tended to consider both short-term and long-term scenarios. Geolocation is also discussed in relation to risk of flood, and the possible ways to mitigate losses caused by damage to branches. The report also discusses emissions intensity modelling and the steps banks are taking to assess their financed emissions, and it gives information on the best practices in these areas.

Some of the key conclusions drawn in the report include:

  • banks and supervisors should continue aligning their climate stress testing capabilities with supervisory expectations;
  • more advanced institutions have effective methods of data sourcing, estimation of climate data, and quantifying impact;
  • climate and environmental risks will remain key priorities of the ECB and other authorities;
  • customer relationships will remain key to continuing to close data gaps;
  • banks have developed capabilities to achieve long-term loss projections but at different speeds; and
  • stress testing will remain key to assessing banks’ vulnerability and progress.

Banks are expected to be able to properly manage their climate risks by end 2024.

Nicola Radford