The world’s largest banks carry more than $1.6 trillion in credit exposures to coal, oil and gas production and fossil-fuel power, according to research published today by Finance Watch.
Finance Watch’s research offers a solution, at limited cost. A climate systemic risk buffer would provide banks with a dedicated cushion against fossil fuel losses and discourage the further buildup of climate risk, protecting the financial system and taxpayers from a crisis.
According to Finance Watch’s calculations, it would be relatively easy to implement such a buffer at EU Banks, which would only need to retain a few weeks of profits to fund the additional capital. It could be introduced without affecting banks’ ability to lend to the real economy.
Mispricing
Julia Symon, Head of Research and Advocacy at Finance Watch, said: “Banks have more than a trillion dollars of exposure to mispriced fossil fuel assets.
“This is a carbon bubble that could burst, like subprimes in 2008. This risk is not properly recognised and banks are not prepared. Banks’ risk models either look backwards or rely on forward-looking climate scenarios that fail to capture the complexities of climate change.
“That allows risk to keep building up. A sudden policy shift or major climate event could trigger sharp market corrections, sending fossil asset prices tumbling.”
She added: “More worrying, their mispricing of fossil fuel loans keeps financing flowing into the industry, accelerating the climate crisis, and multiplying risks across the financial system.”
Transition
Greg Ford, the report’s author and Senior Advisor to Finance Watch, said: “There is a glaring prudential gap that is causing climate-related systemic risks at banks to go unchecked.
“Our research shows that a climate systemic risk buffer would be a low-cost, high-benefit solution to curb the build-up of these risks and make banks more resilient. Crucially, it could be introduced without affecting EU banks’ lending capacity.
“Policymakers cannot ignore a trillion dollars of mispriced climate risk sitting on bank balance sheets. The longer action is delayed, the greater the chance of a disorderly correction that will hit citizens and the wider economy.”
The European Central Bank recently warned that “an insufficiently orderly transition to a green economy may translate into significant losses for the banking sector on exposures related to high-emission firms”. Yet official data shows that climate risks are still not being incorporated properly into banks’ internal models.
This Author
Brendan Montague is a member of the editorial team at The Ecologist. This article is based on a press release from Finance Watch.