Stress with EU climate targets?: Crisis test by the supervisors: Billion dollar risk of climate change

The billion-dollar challenge of the green restructuring of the economy coupled with economic shocks could lead to significant losses for Europe’s banks and insurers. The banking supervisory authority EBA, the insurance supervisory authority EIOPA, the securities supervisory authority ESMA and the European Central Bank (ECB) came to this conclusion in a first cross-sector climate stress test: “In the scenarios examined, it is unlikely that transition risks alone endanger financial stability. However, if transition risks are combined with macroeconomic shocks “When combined, they can increase losses for financial institutions and lead to disruption.”

EU climate targets as a starting point

The European Union has set itself the goal of reducing its emissions of the greenhouse gas carbon dioxide (CO2) by 55 percent by 2030 compared to 1990. The EU wants to be climate-neutral by 2050 – that means: from then on, climate-damaging gases such as CO2 should be avoided or stored. The “Fit for 55” legislative package under the umbrella of the so-called Green Deal is intended to ensure this. The strategy includes measures in various areas such as energy, transport, industry and agriculture.

Billions of dollars are needed to transform the economy from “brown” to “green”. This opens up investment opportunities. At the same time, however, credit risks are increasing as a result of climate change. Supervisors should explore how resilient the financial system is in line with the Fit for 55 package and the extent to which financial institutions would be able to support the climate-friendly transformation of the economy even under stressful conditions.

Played through several scenarios

The stress test looked at a period of eight years (2022 to 2030). The consequences of the following three scenarios were assessed for 110 banks, 2,331 insurers, 629 company pension schemes – these are pension funds – and around 22,000 funds based in the EU:

– The baseline scenario simulates a smooth and timely transition to a lower-carbon economy, with governments implementing the policies of the Fit for 55 package. The economy is growing and energy prices are relatively stable.

– The first negative scenario assumes that investors divest from assets of carbon-intensive companies as climate risks are reassessed.

– In the second negative scenario, macroeconomic stress factors are added to the decline in prices for certain assets. For example, a significant increase in gas and carbon prices is assumed.

Impending billions in losses

In the worst case, according to the supervisors’ calculations, banks’ credit and market losses could add up to 638 billion euros – that would be 10.9 percent of the exposures considered. For insurers, the value of their investments would fall by 18.8 percent or 1,285 billion euros in the second negative scenario; for pension funds it would even fall by 21.5 percent (379 billion euros).

From Germany, Deutsche Bank and Commerzbank, the Landesbanken BayernLB, Helaba, LBBW and NordLB, DZ Bank and Dekabank as well as Germany’s largest German savings bank, Hamburger Haspa, had to take the test. The results should not have any impact on the capital requirements for financial institutions.

Information on the EU “Fit for 55” package EU Commission on climate targets for 2030 Banking supervision EBA on the “Fit for 55” stress test Overview ECB banking supervision on previous and current stress tests ECB on the “Fit for 55” stress test