The European Banking Authority and the European Central Bank published the results of the first EU financial-sector-wide climate stress test on 9 December 2024, revealing that losses across the banking sector could exceed EUR 630 billion in the most adverse scenario — a figure approximately 90 per cent higher than the baseline projection. The exercise was the first of its kind to assess climate risk simultaneously across the banking, insurance, and investment-management industries, providing an integrated picture of potential financial system vulnerabilities under a range of climate and macroeconomic shock combinations.
ECB Vice-President Luis de Guindos said the results indicated that overall financial stability was not at risk under the specific adverse scenarios modelled, but he emphasised that the magnitude of potential losses underscored the importance of banks developing stronger climate risk management frameworks well ahead of any acute shock. The finding sets a quantitative baseline for supervisory dialogue about the adequacy of capital and risk-mitigation plans at individual institutions across the European Union.
TRANSITION RISK DRIVES SEVERITY
The most severe scenario in the exercise combined disorderly climate transition risk — arising from an abrupt or poorly coordinated shift away from fossil-fuel-dependent business models — with a broader deteriorating macroeconomic environment. The interaction between the two factors amplified projected credit losses, market-value impairments on carbon-intensive holdings, and operational disruptions beyond what either shock would produce in isolation. Banks and other financial institutions with large exposures to carbon-intensive sectors, or with significant holdings of physical assets located in regions highly vulnerable to chronic or acute climate hazards, showed the greatest sensitivity to the combined scenario.
Climate stress testing presents distinct methodological challenges compared with conventional macroeconomic stress tests. The relevant time horizons extend well beyond the typical one-to-three-year window of standard bank stress exercises, and the causal pathways from climate policy changes to financial losses are more complex and less historically calibrated. The EBA and ECB have invested considerable methodological work in adapting standard frameworks to capture these dynamics, and the December 2024 exercise represents the most comprehensive cross-sector application of those methods across the EU to date.
REGULATORS CALL FOR IMPROVED RISK MANAGEMENT
The multi-sector scope of the exercise was deliberately designed to capture potential contagion effects and avoid the risk of overlooking concentrated exposures that span the boundaries between banking, insurance, and asset management. By examining how losses propagate across sectors — for example, through reinsurance chains or through the simultaneous repricing of climate-exposed assets held by both banks and insurers — the supervisors aimed to produce a more complete assessment of systemic vulnerability than a bank-only exercise would allow.
The EBA and ECB indicated that the findings would be integrated directly into ongoing supervisory dialogue with individual institutions. Banks identified as having elevated climate-related vulnerabilities are expected to engage with their supervisors on targeted remediation plans addressing both the quality of their climate data and the robustness of their risk appetite and capital planning frameworks. The EBA has previously noted that a significant proportion of European banks still lack the granular data needed to fully quantify their climate exposures, and the December results are likely to intensify pressure on those institutions to close that information gap as a priority.