“Our climate stress test methodology is flawed – we’ll plough on regardless”
The ECB recently published its latest climate stress test – “Fit-For-55”. The one-off exercise, which focused on transition risk associated with the EU’s goal of a 55% emissions reduction by 2030, was picked up by a few news outlets. Scanning through the headlines reveals quite a bit about how climate regulation info is consumed by the industry.
The august Financial Times led with “Climate action to have ‘limited impact’ on financial system, EU finds” which sums up the stated conclusion of the European researchers pretty succinctly. The Banker, in contrast, was looking for a Big Number and so ran with “EU stress test forecasts €630bn bank losses from climate and macro shocks”. Losses of this magnitude really are pretty modest in the context of the €28 trillion European banking sector.
The Belgian National Bank, meanwhile, posted an article with the leader: “Financial sector can support the energy transition, but crises could put this capacity at risk”. This echoes a key finding of the report – that if the climate transition coincides with a deep recession, financial losses will be far steeper than they are under the baseline.
This conclusion continues a long tradition of financial regulators running scenario analyses and then stating the bleeding obvious. Who could have imagined that a banking crisis might reduce the capacity of banks to fund the transition? It boggles the mind! And it’s not like there aren’t things banks could do to become more resilient. Past studies have shown that insurance can help to mitigate losses for banks and that diversification can reduce the risk posed by natural disasters. All of these concepts have been understood by humans since the dawn of civilization.
What will the next stress test discover? That the use of paper money is more efficient than barter if the goal is to foster the net-zero transition? I jest, but the informational content of these exercises is often low to the point of absurdity.