ECB considers putting climate change risks in future bank stress tests

LONDON (Reuters) - The European Central Bank is considering including climate-change risks in future European banking stress tests, ECB Vice President Luis De Guindos said on Thursday.

European Central Bank (ECB) Vice-President Luis de Guindos attends a news conference on the outcome of the meeting of the Governing Council, in Frankfurt, Germany, October 24, 2019. REUTERS/Ralph Orlowski

Speaking at a BNP Paribas banking conference in London, De Guindos said the monetary policy implications of climate change would come into discussion over the next quarters.

“It is something we are paying much more attention to, especially in terms of financial stability,” he said.

Climate change is becoming a bigger issue for central banks, as demand is rising for investment to be environmentally sustainable.

“Climate change involves a lot of actors and central banks have to play a role,” he said.

“For instance, something that we have started to consider is including climate change potential risks in the adverse scenario of the (banking sector) stress tests.”

A methodology for calculating risks related to climate change is not yet fully developed so it is unlikely to be included in next year’s European Banking Authority stress test, but it could be used in 2022.

The EBA stress test is an assessment of risks to the functioning and stability of financial markets across the European Union. It takes place every two years.

As part of global plans to reduce carbon emissions, the European Commission proposed last year to establish an EU-wide classification scheme for sustainable investments, known as a taxonomy.

De Guindos said the taxonomy was very important.

The ECB vice president also said the risk of a European recession was “very low” and that low bank profitability was the main financial stability risk in the euro zone.

Reporting by Elizabeth Howcroft and Marc Jones; Editing by Dale Hudson