Stockholm (NordSIP) – According to a recent article on Bloomberg, the European Central Bank (ECB) may soon be announcing the name of four banks it intends to fine due to their failure to assess their exposure to climate risks on time. The report noted that the fines can “accumulate daily” and “reach up to 5%” of a bank’s daily average revenue. This sentiment was later reiterated to Spanish newspaper El País by Kerstin af Jochnick, a member of the ECB’s Supervisory Board.
If such fines came to pass, they would be the realisation of a warning already made on March 14th by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB.
Climate Risks and European Banks
Two months ago, Elderson reviewed the current state of climate-related and environmental (C&E) risks faced by Eurozone banks at the 331st European Banking Federation Executive Committee meeting.
On that occasion, he noted that the ECB has “urged banks to ensure the sound management of C&E risk” and that “failing to adequately manage C&E risks is no longer compatible with sound risk management, just as it would not be acceptable to turn a blind eye to other relevant drivers of standard risk categories.”
“Although at present none of the banks under our supervision fully meets all our expectations, each and every of our expectations has already been fulfilled by at least one bank. This shows that progress is possible, and that it is not just taking place among a few banks, but across the board. This is good news, since we expect all banks under our supervision to be fully aligned with our supervisory expectations by the end of 2024,” Elderson argues.
Elderson concluded his speech with a warning. “2024 is a crucial year for our supervisory priority to make banks resilient to climate and nature risks. By the end of this year, we expect all banks under our supervision to be aligned with our supervisory expectations. We will closely monitor banks’ progress towards meeting final deadlines. And, if necessary, we will use all the measures in our toolkit to ensure the sound management of C&E risks. These include imposing periodic penalty payments and setting Pillar 2 capital requirements as part of the annual Supervisory Review and Evaluation Process,” Elderson said.[emphasis added]
Why Should Central Banks Care About Climate Change?
These reported upcoming fines should be considered in light of the ECB’s broader take on the role of central banks and monetary policy in the face of climate change.
In a recent speech, Piero Cipollone, Member of the Executive Board of the ECB, considered the role of the ECB regarding climate change. Noting that delayed investments in the transition are likely to create higher climate change and climate change mitigation costs that will affect the price level on the supply side, Cipollone noted four profound implications for central banks’ core task in preserving price stability.
“First, evidence underscores how extreme weather, such as unusually hot summers, affects both the level of inflation and its volatility,” Cipollone says. According to ECB research estimates, food inflation in Europe increased by around 0.7 percentage points cumulatively over 12 months due to the extreme summer heat in 2022. Second, Cipollone uses the effect of Russia’s invasion of the Ukraine and its impact on energy prices and therefore on inflation to argue that “a slow green transition increases the economic impact of these supply shocks. (…) Greater availability of renewable energy would have reduced the magnitude of the shock.”
Third, he notes that climate change could change the natural rate of interest underlying monetary policy and tied to productivity. “Studies have found that a 1°C increase in temperatures above 25°C reduces productivity by roughly 2%,” Cipollone argues, before noting that “if not correctly priced in, climate change implies financial risks for the central bank’s balance sheet.”
