The European Banking Authority (EBA) is planning to revise capital requirement frameworks to make banks include environmental and social risks in required industry-wide reserves.
In a report, chairman Jose Manuel Campa stated that the EBA has identified some immediate solutions to minimum requirements (pillar 1). Other changes will be introduced gradually, he said, and a few will necessitate new legislation as outlined in the EBA’s recently published report.
Up to this point, regulators mainly focused on bank disclosure and individual bank-specific risks (pillar 2) because they lacked enough data and methods to assess ESG risks across the sector.
The objective is to address the growing concerns among regulators regarding threats to financial stability posed by ESG factors such as climate change and inequality.
In response to the EBA’s consultation last year, the European Banking Federation disagreed with using pillar 1 to tackle climate risks. They argued that capital assessments should accommodate variations in bank balance sheets. The industry group also noted that predicting losses based on uncertain scenarios is unreliable for setting capital levels.
EU bank BNP Paribas SA also cautioned that raising capital requirements could hinder banks in offering transition financing without improving the industry’s overall resilience.
The EBA report offers short and long-term adjustment guidelines for banks and national supervisors. It states that banks and regulators must revaluate collateral values, incorporate environmental risks in trading book risk limits, internal trading boundaries, and new product development, ensure external credit assessments account for environmental and social factors as credit risk drivers, and more.
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