The European banking supervisor, the European Banking Authority (EBA), has announced the publication of a new report assessing the role of environmental and social risks in its prudential supervisory framework for banks and investment firms, including recommendations for accelerating these risks across the pillar 1 framework. which defines the minimum capital requirements of banks.
According to the EBA, the new report comes at a time when environmental and social risks are expected to become more prominent over time, changing the risk profile for the banking sector, across financial categories such as credit and market risk, as well as operational risks, and possibly both individual institutions and the stability of the financial system as a whole are affected.
The report sets out a series of short-term actions recommended by the EBA to be taken over the next three years, including including environmental risks as part of stress testing programmes, encouraging the inclusion of environmental and social factors as part of external credit assessments by credit institutions. rating agencies, and as part of due diligence requirements and valuation of real estate collateral. Additional near-term recommendations include requiring institutions to determine whether environmental and social factors are driving operational risk losses and developing environmental concentration risk measures as part of supervisory reporting.
In the longer term, the EBA report presents possible revisions to the Pillar 1 framework, in light of the increased importance of environmental and social risks, including the possible use of scenario analysis to strengthen the forward-looking elements of the prudential framework. the role of transition plans as part of the development of further risk-based improvements to the Pillar 1 framework, reassessing the appropriateness of the revision of the Internal Ratings Based (IRB) Supervisory Formula and the Standardized Approach to Credit Risk to better address environmental risk and introducing environmental concentration risk measures in the context of Pillar 1.
The report also indicated that the EBA currently does not support the introduction of a ‘green support factor’, which would reduce prudential capital requirements for environmentally sustainable exposures, or a ‘brown penalty factor’, which would conversely reduce capital requirements for environmentally harmful assets to increase. .
click here to access the EBA report.