EU-Wide Climate Stress Test Finds Banking Sector Losses Could Exceed EUR 630 Billion in Severe Scenarios

The European Supervisory Authorities (EBA, EIOPA and ESMA) and the European Central Bank published the results of the first EU financial-sector-wide climate stress test on 19 November 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 assessed climate risk across the banking, insurance, investment-fund and pension-fund sectors.

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 said the substantial losses under the second adverse scenario highlighted the need for financial institutions to properly manage climate-related risks. The authorities cautioned that, given the novelty of the methodology and data challenges, the results are subject to a large margin of uncertainty.

MOST SEVERE SCENARIO

The most severe scenario in the exercise combined transition risk — implementation of the Fit-for-55 package together with an abrupt investor flight from carbon-intensive ('brown') assets — with a broader deteriorating macroeconomic environment. The interaction between the two factors amplified projected credit losses, and market-value impairments on carbon-intensive holdings beyond what either shock would produce in isolation. Banks and other financial institutions with large exposures to carbon-intensive sectors, showed the greatest sensitivity to the combined scenario.

REGULATORS CALL FOR IMPROVED RISK MANAGEMENT

The multi-sector scope of the exercise was designed to capture potential contagion effects across banking, insurance, and asset management.

The ESAs and the ECB said the findings call for a coordinated policy approach to financing the green transition and for financial institutions to integrate climate risks into their risk management in a comprehensive and timely manner. The EBA has previously noted that a significant proportion of European banks still lack the granular data needed to fully quantify their climate exposures.