Inclusion of climate risks in stress tests at banks and savings banks

Banka Slovenije and the ECB are continuing their efforts to include climate risks in the performance of their key tasks. So it was that the ECB conducted climate risk stress tests for the largest European banks this year, and an exercise for the other banks. The exercise was also conducted at Banka Slovenije for the smaller banks and savings banks along the lines of the ECB model. These are the first stress tests and exercises of their kind, and are primarily aimed at raising awareness and understanding and identifying weaknesses. At the ECB level and in Slovenia too they primarily revealed the need for better quality of and access to data, and for the inclusion of climate risks in the internal processes of the commercial banks.

The ECB conducted climate risk stress tests for the largest European banks (no Slovenian banks among them) in March and April of this year, and an exercise for the other banks. They mainly revealed the need for better data quality in this area. Banks and savings banks will have to put in place appropriate high-quality data resources in this area, and consistent internal reporting. They will also have to start taking account of climate risks in their internal stress testing, and in other relevant processes. More on the results can be found on this link.

Banka Slovenije also embarked on the exercise in March and April, on the lines of the ECB SSM model. It included the less significant banks, the subsidiary banks under majority foreign ownership and SID banka. The exercise had two modules, in line with the ECB methodology. The first module consisted of a questionnaire that aimed to obtain information about the structure of internal stress testing on the subject of climate risks. The second module consisted of a calculation of interest income and fee and commission income from carbon-intensive sectors, and a calculation of estimated financed emissions.

Similarly to those at ECB level, the results indicate that the inclusion of climate risks in stress testing is only in its infancy. The majority of banks will begin including risks of this type in their internal processes towards the end of 2022 and in early 2023. Banks are in particular facing a shortage of relevant, high-quality data.

While having regard for the aforementioned limitations on access to data on greenhouse gas emissions at the individual firm level, Banka Slovenije’s finding is that banks generated just under a fifth of their interest income and fee and commission income in the sample in 2021 in carbon-intensive NACE sectors as defined by the ECB. This figure also represents an estimate of the share of business that will be subject to transition risks over the long term. Most of the income comes from the sectors of electricity supply, retail, and warehousing and support activities for transportation.