The ECB yesterday announced the methodology regarding the first Climate Risk Stress Test (CST) that banks will have to take in 2022. The ECB has made it clear that the CST will be seen as a ‘learning exercise’ for both banks and regulatory authorities. supervision, with the aim of identifying the vulnerabilities of the sector and the challenges that banks will have to face in relation to climate change.
The test, as Equita points out, is made up of 3 modules: Module 1 – A general questionnaire to assess how banks are assessing climate risk to date; Module 2 – A peer benchmarking analysis to compare banks on a common set of climate risk parameters in order to provide an indication of the sustainability of banks’ business models and how much they are exposed to emission-intensive firms; Module 3 (intended only for systemic banks) – A bottom-up stress test on the risks associated with extreme weather events, the increase in the price of CO2 emissions over the next three years and how banks would respond to energy transition scenarios in the next 30 years years.
“This is a first step for the regulator, who directs his supervision activities on climate risk, considered to all intents and purposes one of the systemic risks to be monitored in his own activity” specify from Equita. “However, we emphasize that the stress test results will be integrated into the Supervisory Review and Evaluation Process (SREP) using a purely qualitative approach. Furthermore, there is no direct equity impact on the Pillar 2 Guidance component ”they conclude.