(Bloomberg) -- European banks are increasingly setting aside money to digest potential losses from climate change, responding to pressure from their top regulator.
Some 55% of lenders now take climate and environmental risks into account when building so-called provisioning overlays, up from 16% in findings last year, the European Central Bank said Monday in Frankfurt. That confirmed a Bloomberg report from May.
The ECB has led efforts to prepare banks for losses from new types of risk, including extreme weather and the impact of the transition to a greener economy on clients. Some lenders have pushed back, warning that extra environmental and climate buffers put them at a disadvantage to competitors in the US, where such demands don’t exist.
The increasing share of banks that factor in climate risks is an initial sign that the ECB’s recommendations “have been understood and accepted,” the watchdog said. However, “there is still a long way to go” in terms of managing climate and other risks, according to the report.
The methods banks use aren’t commensurate with their exposure and are even contradictory in many cases, the ECB said. It cited the fact that while banks use specific data to calculate expected credit losses, many ignore that information when it comes to deciding whether the quality of their loan book has deteriorated.
Such analysis is mainly done at the level of individual borrowers “with very limited use of collective assessment,” the ECB said.
Other findings in the report on provisioning data and practices for “novel risks” at the end of 2023 included:
- Many banks aren’t prepared for geopolitical risks as their use of overlays and in-model adjustments is not commensurate with “rising uncertainties”
- Provisioning for commercial real estate loans is “a particular weak spot”
- “Only half of the banks described having a sectoral approach to measure the impact of interest rate risk”
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