The climate risks assessed in banks’ stress tests will eventually factor into their capital requirements, says Fitch Ratings.
In a new report, the credit rating agency says that bank regulators’ efforts to introduce climate change stress testing in order to quantify banks’ climate-related risks will impact prudential capital standards.
Fitch said that regulators in Europe and the U.K. are currently most advanced in evaluating banks’ climate risks, but that Japan is said to be undertaking climate stress tests, too.
“The [European Central Bank (ECB)] is the only regulator to make clear that climate scenario analysis and stress testing should explicitly feed into banks’ capital adequacy,” Fitch said.
“We believe this is to help drive the European Green Deal,” it noted, which aims for “climate neutrality for the EU by 2050.”
Fitch said that it expects climate stress testing will also “make banks more aware of how climate risk can increase other types of risk, including credit, market, business and reputational risk.”
A result of that could be stronger sustainability objectives and an overall effect on capital requirements across Europe, the agency said.