At the beginning of May, the European Banking Authority (EBA) published a discussion paper on the role of environmental risks for credit and securities institutions. CURENTIS summarizes the key points from this paper for you.
The discussion focuses on how and whether environmental risks should be included in the Basel Pillar 1 prudential framework. The possible inclusion of a forward-looking perspective in the prudential framework is addressed by the EBA, which emphasizes the importance of gathering reliable and, above all, relevant information on environmental risks and their impact on institutions' financial losses. The EBA believes that environmental risks in the financial sector will have an even greater impact on the risk picture in the future than they already do with regard to traditional risk classes such as credit, market or operational risks. Therefore, the question needs to be answered whether these new risk drivers are taken into account under the current supervisory framework. To this end, the discussion paper provides an analysis of the extent to which environmental risks are already incorporated into Basel Pillar 1 capital requirements through internal and external ratings, valuation of financial instruments and collateral, or scenario analyses.
The possible introduction of new specific risk-weighted adjustment factors would be an alternative to identifying environmental risks within a given structure of the framework and is currently under closer consideration. However, the outcome of an initial analysis indicated that targeted changes to existing prudential requirements would address these risks more accurately than such above-mentioned adjustment factors. In support of the resilience of financial institutions, the EBA noted that the paper takes a risk-based approach to ensure that the supervisory framework reflects the underlying risks. The EBA emphasized that the purpose of the supervisory framework is not to achieve specific environmental objectives. However, the environmental objectives could be supported by the risk-based framework, especially if combined with other policies.
You can find the complete discussion paper here.