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The European Central Bank has said lenders in the region will need to estimate the risk they could face from climate change in their lending and trading operations when they undergo a stress test next year.

Banks will have to forecast the evolution of their balance sheets over 30 years as well as the related losses they could face in the transition to a more sustainable economy, according to a methodology released by the central bank on Monday.

The ECB is also calling on lenders to assess the impact of a theoretical “sharp increase” in the price of carbon emissions over a three-year period. Bloomberg announced the inclusion of trading exposures in September.

In the stress test, which will run from March to July 2022, the ECB will examine in more detail the problems banks may face due to climate change mitigation policies that could bank polluting companies as well as extreme weather conditions. The watchdog criticized the industry earlier this year for being too slow to get a handle on climate change risks, citing patchy data and a lack of attention from executives.

The short-term portion of the test assumes carbon prices to rise $ 100 per tonne by 2024, several years earlier than in scenarios developed by central banks and international regulators. While this is an “tail risk,” it has the advantage of testing the vulnerability of banks’ current exposures to “a messy transition,” the ECB said.

Such a “sudden and unexpected increase in the price of carbon emissions or other non-tariff measures to reduce emissions” would hit carbon-intensive industries while other parts of the economy would also see an indirect impact via the carbon-intensive industries. production chains and other side effects. , said the ECB.

Impact on capital

The exercise, which is part of a larger examination of how banks cope with climate risks, also includes questions about the revenues lenders generate from carbon-intensive industries as well as the volume of shows they finance. In addition to the transition risk scenarios, banks will be asked to simulate the effect of physical risks, such as floods, over a one-year horizon.

As European politicians rely on banks to divert funding from polluting industries, the ECB has focused on ensuring that banks are prepared for risks in a warmer world. On Monday, the ECB reiterated that there will be no direct increase in bank capital requirements as a result of the test, but lenders who cannot grasp their risks could face a higher bar.

(Updates with increasing carbon price in sixth paragraph)

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