EU financial regulators to carry out financial system climate stress test


The EU’s financial regulators are planning to carry out a system-wide analysis of the financial sector’s climate-related risk resilience.

ESG Today highlighted that the stress test will also measure the system’s ability to facilitate financing for Europe’s green transition under stress scenarios – according to John Berrigan, European Commission Financial Stability, Financial Services and Capital Markets Union Director.

A letter by Berrigan was sent to the European Supervisory Authorities and indicates that the analysis will focus on assessing the financial system’s resilience in the EU’s 2030 transition goal to reduce greenhouse gas emissions.

Berrigan said, “To ensure financial stability and to enable the financial sector to play its role in financing the transition, we need to be aware of any potential vulnerabilities in the financial sector and of how stress in the financial system could affect the transition to the 2030 goals.”

The letter also emphasised that the stress-test exercise must go beyond usual climate stress tests, emphasising that the regulators should work together to conduct a cross-sector assessment. The assessment should look at not just individual sector resilience but also contagion and second-round effects to expose system-wide vulnerabilities.

The European Commission explained, “The one-off exercise should focus on the EU financial system as a whole. It should assess its resilience until 2030. This will require modelling contagion and second-round effects across firms and sub-sectors of the financial system.”

ESG Today highlighted that the analysis is expected to go beyond examining climate-related shocks but also to incorporate other stress factors such as the combination of climate-shocks with adverse macrofinanical scenarios used in ordinary financial sector stress tests.

The Commission also asked that the analysis should provide insight into the system’s capacity to continue channelling capital to support the EU’s climate goals. The Commission noted that it anticipates annual additional investments of €350 billion will be needed to meet its 2030 emissions targets.

The document stated, “Such a level of investment cannot be achieved just by public spending. The EU has therefore developed a sustainable finance framework that aims to channel private financial flows into sustainable economic activities.”

The Commission said that the results of the test could be used by policymakers to understand the potential impact of climate-related shocks, and to feed into the regulators’ and central banks’ future supervisory and monitoring programs.

The Commission asked for the results of the test to be submitted by the end of 2024, and no later than Q1 2025.

Last year, it was revealed banks in Taiwan will undergo mandatory climate change stress tests in 2023 to measure the impact of a range of potential environmental disasters on lenders’ assets.

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