European banks show resilience in ECB climate stress test, but next challenge could be tougher

The European Central Bank's (ECB) test of the resilience of lenders to the financial and economic consequences of global warming have turned out to be far more benign than widely expected, business daily Handelsblatt reports. None of the climate stress test’s hypothetical scenarios would have resulted in losses and significant gaps in the banks’ capital buffers, according to representatives of six European lenders taking part in the challenge. As part of the test, banks assessed the risk they face if increasing flooding reduces the value of real estate or if rising CO2 prices drive corporate customers into bankruptcy. Other scenarios envisaged a disorderly transition, in which governments are forced to raise the price of carbon emissions after initially failing to take timely action, and the dreaded "hot house", in which politicians take no action and global warming increases by around 3°C. Although the test was primarily intended as an exercise, the industry is now using the results to challenge calls from some regulators for more reserves to protect from climate risks, the article says. The banks’ performances appear to reflect the optimistic prognosis offered by German banking association BdB in June.

While the earnings of participating banks appeared sufficient enough to compensate for losses, the next climate stress test could be tougher and include more stringent parameters. The European Banking Authority will likely conduct it next year. The ECB in Germany's financial capital Frankfurt am Main plans to publish the results of the latest test on 8 July.