Greek Banks Must Assess Climate Risks and Emission Reductions by Year-End Amid ECB Policy Changes

Greek banks are gearing up to meet new requirements that mandate assessing climate-related risks at all levels and submitting their evaluations to the European Central Bank (ECB) by the end of the year. Additionally, these banks are expected to guide large customers in reducing emissions and advocate for energy upgrades in homes.

Adjustments in ECB Financing Terms

In conjunction with these developments, the ECB plans to modify its monetary policy based on climate risks by gradually substituting borrowing operations with bonds from member states, focusing on supranational bonds that have a green identity. The ongoing review of the types of loans that banks can secure for long-term refinancing may result in the rejection of loans lacking a green identity card.

Compliance Deadlines and Potential Fines

European banks appear to have lagged in fulfilling these obligations and now face the threat of daily fines for non-compliance as the year-end deadline approaches. A serious assessment of the costs involved is necessary to put large clients on a pollution reduction program, as the risk of not securing financing from banks looms large if they fail to comply.

Regulatory Scrutiny and Compliance

As Frank Elderson, Member of the ECB's Executive Board and Vice-Chairman of the ECB's Supervisory Board, emphasized at a symposium in Amsterdam, banks are required to conduct thorough assessments of the impact of climate and nature-related risks across their portfolios. Twenty-eight banks, including Greek banks, have received binding supervisory decisions from the Single Supervisory Mechanism (SSM). Of these, 22 have been warned that failure to rectify deficiencies by a specified date will result in periodic monetary penalties for each day of non-compliance.

It is a positive sign that most banks have now submitted meaningful risk assessments to the SSM, showcasing the effectiveness of supervisory oversight. For those banks that have not yet complied, an ongoing process is determining the imposition of fines. The Bank of Greece has characterized the performance of Greek banks in this area as mediocre, indicating they have not achieved a commendable performance despite not being at the bottom of the climate reform list.

Climate Risks and Inflation Concerns

The relevance of climate and nature-related risks to the economy and financial system has been explicitly acknowledged by lawmakers. The revised Capital Requirements Directive, which outlines the regulatory framework for banks in Europe, explicitly references these risks, integrating the European Union's climate goals into its broader economic policies.

Evidence is mounting regarding the macroeconomic importance of these risks. For instance, natural risks, such as increases in food prices due to extreme heat waves, threaten price stability and contribute to inflation. This risk has been highlighted in the ECB's recent assessments and monetary policy announcements.

Since 2021, the ECB has begun accepting sustainability-linked bonds as collateral, contingent on meeting eligibility criteria. The central bank has decided that only assets complying with the EU Corporate Sustainability Reporting Directive will remain eligible once the directive takes effect, while exploring further integration of climate parameters into its operations.

Future of ECB Financing for Banks

Looking ahead, the ECB may contemplate additional measures alongside the existing adjustments. Presently, the majority of the ECB's monetary policy assets consist of bonds issued by EU member states. However, the increasing intensity of climate-related risks may prompt a reevaluation since these bonds may not align with climate objectives.

The total issuance of supranational bonds by EU institutions has surged since the pandemic, with green bonds making up a significant portion. According to Frank Elderson, if there is no compelling rationale for prioritizing domestic government bonds, the ECB should consider increasing the proportion of EU supranational bonds in its overall portfolio to mitigate potential climate-related risks.

The ECB may also review its Targeted Longer-Term Refinancing Operations (TLTROs) for banks if necessary in the context of monetary policy. There are grounds for the ECB to adjust the composition of these operations to favor green finance loans. A precedent for this exists from 2019 when TLTROs featured lending targets that excluded mortgages to curb real estate bubble risks.

As the year draws to a close and banks submit detailed risk plans, they will be required to outline their future practices. It is imperative for banks to ensure their risk management practices are commensurate with the significant climate and nature-related risks they face.

By fLEXI tEAM