EBA discusses inclusion of environmental risks in Pillar 1
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 summarises the most important points from this paper for you.
The discussion focuses on the question of how and whether environmental risks should be included in the prudential framework of Basel Pillar 1. The possible inclusion of a forward-looking perspective in the supervisory framework is addressed by the EBA, which emphasises the importance of gathering reliable and, above all, relevant information on environmental risks and their impact on institutions' financial losses. The EBA is of the opinion that environmental risks in the financial sector will influence the risk picture even more in the future than they already do with regard to the classic risk classes such as credit, market or operational risks. Therefore, the question must be answered whether these new risk drivers are taken into account under the current supervisory framework. For this purpose, the discussion paper provides an analysis of the extent to which environmental risks are already included in the capital requirements of Basel Pillar 1 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 being further considered. However, the outcome of a first analysis indicated that targeted changes to the existing prudential requirements would address these risks more accurately than such adjustment factors mentioned above. In support of the resilience of financial institutions, the EBA notes that the paper takes a risk-based approach to ensure that the supervisory framework reflects the underlying risks. The EBA emphasised 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.
