Europe | Forecasts, banks and climate stress tests

In 2022, the stress test to which the ECB periodically submits European banks, is organized around different climate risk scenarios. This new exercise will be a challenge and a learning process for both the supervisor and the supervisee.

Key points

• Key points:
• The European Central Bank (ECB) carries out periodic banking stress tests, setting out adverse economic scenarios for which the banks have to calculate the impact on their balance sheets and income statements.
• The adverse economic scenario has been, for year after year, a typical one: rising risk premiums, lower GDP, higher unemployment and falling house prices. All of which could reduce the payment ability of the banks' customers and as a result hit their balance sheets.
• For 2022, the ECB has proposed various climate risk scenarios, resulting from both climate transition and physical events (droughts and floods). A challenge which is further increased by the room of improvement on availability and granularity of the data and the complex modeling of the impact of climate change on the economy.
• This year's banking stress tests on climate risks—and those in the future—will be a challenge and a learning process for both the supervisor and the supervisee.

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