Mobilising banks in the transition: supervisors must have better use of risk management
The European Union is continuing its efforts to ensure that the banking system takes climate change into account. Banks will have to draw up a “transition plan”, according to the European Banking Authority’s (EBA) guidelines that are out for consultation until April. One could hope that the banking authorities would seize this opportunity to encourage banks to better finance the transition, since their voluntary commitments are not sufficient. But the EBA does not make it a clear objective.
For the EBA, the explicit aim of these climate plans is to ensure that banks are resilient to the risks associated with the transition and climate impacts. Can we expect any benefit in terms of mobilising banks for climate action?
Not as it stands. The proposal simply asks banks to manage their exposure to financial risks linked to climate impacts and to the EU’s transition objectives. Typically, a bank will have to assess whether oil companies risk losing their ability to repay their loans because of the transition. And the answer may be no, if the bank thinks that one or more companies will be financially robust long enough to repay its loan, or if the bank considers that the transition scenarios generating the largest financial impacts are not very credible…
But still looking at it from the prudential perspective, which is a responsibility of the banking authorities, it would be in our interest to encourage the transition for the sake of risk management. The greatest risk to the financial system in Europe is above all the lack of a transition, which would lead to repetitve and unmanageable climate impacts that are still underestimated. The prudential authorities must therefore take up this objective, and the challenge is to define how. In particular, it will be necessary to remain consistent with governments’ action plans, while monitoring banks’ ability to take on risk to finance the transition. Transition plans should help!
In I4CE‘s newsletter of this week, you will discover our report which discusses the links between risk management and the mobilisation of the banking sector for the transition. You will also find our recommendations for strengthening the EBA’s proposal, and rethinking more broadly the link between prudential regulation and governments’ climate action.
