The European Central Bank (ECB) launched a climate-risk stress test to assess banks’ ability to cope with financial and economic shocks due to climate risk. The exercise, which will be conducted in the first half of 2022, is made up of three components: (i) a questionnaire on banks’ climate stress test capabilities, (ii) a peer benchmark analysis to assess the sustainability of banks’ business models and their exposure to emission-intensive companies, and (iii) a bottom-up stress test, which focusses on exposures and income sources exposed to climate risk rather than banks’ overall balance sheets and makes use of scenarios prepared by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). These scenarios reflect possible future climate policies and assess both physical risks, such as heat and droughts and floods, and short- and long-term transition risks.

Banks should submit their climate-risk stress-test templates to the ECB starting in March 2022. The ECB will consider the results as part of the supervisory review and evaluation process (SREP). The stress test could indirectly impact Pillar-2 requirements through the SREP scores but will not directly impact capital through Pillar-2 guidance.

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