ECB 2022 climate risk stress test

The ECB's first climate stress test of the banks it directly supervises reported its results on July 8, 2022. 104 significant banks took part, across three modules. The first, a questionnaire, scored each bank's ability to run its own climate stress tests. The second compared banks with each other on a set of metrics, including the share of income from emitting sectors and financed emissions. The third, a bottom-up stress test in which banks compute their own losses on prescribed scenarios, covered only 41 institutions. The scenarios mixed three horizons: one year for two physical shocks, drought and heat on one side, flooding on the other; three years for a disorderly transition with a spike in the carbon price; thirty years for long-term transition paths. The figure quoted everywhere: about 70 billion euros of cumulative credit and market losses for the 41 banks, under the short-term transition shock and the two physical scenarios. The ECB itself said it understated the risk. Its scenarios assumed no recession, the banks' data and models were patchy, and the exposures studied covered only about a third of the total. The benchmarking module said more. Almost two-thirds of income from non-financial corporate customers came from greenhouse gas-intensive industries, and about 60% of banks did not yet include climate risk in their stress testing framework. The exercise was billed as a learning exercise, with no direct capital implications; its findings fed into the SREP only qualitatively. For an underwriter or an insurer's asset manager, its value lies elsewhere: it set a grammar, short and long horizons, physical and transition risk kept apart, that the Fit-for-55 exercise and the NGFS short-term scenarios later took up.