Climate change is also challenging the financial sector. Some risks could become expensive. The bank supervisors at the ECB have now taken a close look at the resilience of the financial institutions when it comes to the mega-topic of climate.

Extreme heat, severe flooding, a drastically rising price for the emission of climate-damaging carbon dioxide (CO2) – how well are banks in the euro area armed against financial and economic shocks from climate risks?

A special stress test by the European Central Bank (ECB) should provide answers to this question. The ECB published the results today (10.15 a.m.).

The ECB’s first climate stress test will not fail, as the ECB’s banking supervisor has assured. The data collected should also have no direct impact on the capital requirements for the institutes. The aim of the exercise was to identify weak points and challenges of financial institutions in connection with the management of climate risks.

In the climate stress test, the supervisors looked at two types of risk: On the one hand, physical risks such as damage to buildings as a result of a flood. On the other hand, risks associated with the restructuring of the economy: The adjustment process towards a lower-carbon and ecologically more sustainable economy can lead directly or indirectly to losses for banks.

Depending on how quickly the emission of CO2 and other climate-damaging gases is reduced through political measures and global warming is slowed down, such risks come into play to a greater or lesser extent. This was modeled in the stress test in three long-term scenarios. Based on their balance sheet as of December 31, 2021, the banks had to project at ten-year intervals (2030, 2040, 2050) how their mortgages and corporate loans would develop under these assumptions.

The ECB has been directly monitoring the largest banks in the euro area since November 2014. There are currently 111 institutions that represent almost 82 percent of the banking market in the currency area of ​​the 19 countries. From Germany, these include: Deutsche Bank and Commerzbank, the central cooperative institution DZ Bank, the savings bank securities house Dekabank, the real estate financier Aareal Bank, the Hamburger Sparkasse (Haspa) as Germany’s largest savings bank and the state banks BayernLB, LBBW and Helaba.