The media reports that the European Central Bank intends to take an unprecedented and largely sensational decision in the form of fines against several financial institutions that have been demonstrating their inability to combat the effects of climate change for a long period.
Journalists, citing insiders, claim that the mentioned measure of impact at the initial stage will affect four creditors. According to preliminary information, Europe’s main financial regulator plans to apply penalties because the mentioned banks do not comply with the deadlines set by the ECB to assess their exposure to climate risks. It is not yet known what amounts lenders will be forced to pay if the decision, the probability of which was reported by the media, is still made. Insiders say that the volume of the fine has not yet been finalized. They also argue that, with a high degree of probability, the corresponding amounts will be symbolic and their main meaning will be fixing a precedent in the form of applying measures of impact against financial institutions that demonstrate insufficient efforts in the context of the climate issue. Insiders used the right to anonymity, noting that the potential ECB decision is not yet public.
A spokeswoman for Europe’s main financial regulator, which directly oversees more than 100 banks, did not respond to a media request for comment on information about fines.
The ECB has its own vision of how banks should manage climate risks. The information published by the media indicates that the financial regulator is striving to ensure that the mentioned concept becomes something like guidance for all lenders that are in the area of its control. The willingness to apply penalty mechanisms is a confirmation that the ECB perceives climate risk management as one of the most important tasks. At the same time, it should be noted that the relevant intentions of the financial regulator have not yet been officially confirmed.
It is worth noting that in September, former banking supervision head Andrea Enria, during a conversation with media representatives, said that the ECB would probably use the penalty mechanism as a solution that is an alternative to higher capital requirements.
Journalists also released preliminary information that fines could amount to 5% of the lender’s daily average earnings. For example, for a bank with annual revenue of around 10 billion euros ($10.9 billion), in the case of the most stringent regulatory scenario, the daily impact measure in its financial terms will amount to 1.4 million euros. At the same time, this is one of the possible solutions, the implementation of which is not guaranteed. The final amount of the fine may be much less.
There is also insider information that the measures of impact will have a daily mechanism of application, which will be stopped only after the elimination of relevant deficiencies in the functioning of the financial institution. Moreover, in this case, it is noted that the practice of mitigating factors can be used. In a practical sense, such a decision means that fines can be eased or even canceled in certain circumstances, about which there is no information yet.
It is worth noting that the ECB has repeatedly stated that lenders are making insufficient efforts to prepare for the effects of extreme weather conditions on asset values and the risk of bankruptcy of customers with big carbon footprints. Also, the financial regulator has already noted the likelihood of applying a penalty mechanism, implying the likelihood of appropriate measures against 18 banks and hinting at further scaling up of such practices. At the same time, the watchdog did not take any specific actions after the mentioned readiness was stated.
It is worth noting that the current European regulations require banks to assess the degree of exposure to material risks or the level of risk that the corresponding probability will become a reality. Lenders should also reflect the relevant findings in their capital reserves. The ECB argues that creditors should understand all the factors that affect climate and environmental risks, and clearly recognize how their activities relate to such probabilities.
It is worth noting that Europe’s main financial regulator, in the context of an approach to climate risk management, adheres to a tougher position compared to a similar concept of the Federal Reserve System, whose chairman Jerome Powell stated that the central bank of the United States has a narrow but important responsibility regarding the negative aspects of the impact associated with changes in the environmental background. European financial institutions have already noted that the regulatory framework established by the ECB may cause them to be at a competitive disadvantage in comparison to US lenders.
Frank Elderson, a member of the ECB’s Executive Board, has shown little desire to slow down the European Union’s efforts to combat climate change. On May 8, he posted a message on his blog, which contains a statement that materiality assessment is not just a nice to have – knowing risks is a precondition for being able to address them.
Some banks have already started setting aside capital to cover the risks associated with climate change and have improved their risk management system. Frank Elderson noted that certain shortcomings were made in this case. According to him, banks did not take into account all relevant risk categories. He also stated that the lenders focused only on the risks of the transition period and did not take into account the physical risks or considered only subgroups of geographical regions. Moreover, Frank Elderson noted that using a net rather than a gross approach to identify potential threats impairs banks’ ability to measure the actual impact and plan mitigation measures.
As we have reported earlier, ECB Says About Need of New Rules for AI’s Use in Finance.
