ECB: Most European Banks Don’t Measure Climate Risk

Europe’s banks are not ready to deal with climate catastrophes, according to the continent’s central bank—and that could lead to losses of at least $71 billion for the eurozone’s largest lenders.

The economic ripple effect would be considerable, affecting businesses far and wide, the European Central Bank’s climate stress test concluded after a survey of 104 institutions in the European Union. North American pension funds and other asset allocators have considerable investments in Europe, which is also a major trading partner for the U.S. and Canada.

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The study comes as Europe endures a summer of extreme heat, scant rainfall and wildfires, a situation made worse by climbing energy prices and looming natural gas shortages stemming from the Russia-Ukraine war.

The ECB study reveals that some 60% of banks lack a climate risk stress-testing program. Further, 80% of them don’t factor in climate risk when making loans. In addition, just under two-thirds of banks’ earnings from nonfinancial corporate customers is provided by greenhouse-gas-heavy industries.

“Euro area banks must urgently step up efforts to measure and manage climate risk, closing the current data gaps and adopting good practices that are already present in the sector,” the ECB’s chief supervisor, Andrea Enria, said in a statement.

Europe has been far more ambitious in its climate regulation and oversight than has the U.S. For instance, earlier this year, the European Insurance and Occupational Pensions Authority conducted a stress test to gauge the resilience of the European Union’s pension funds during a climate emergency.

U.S. banks are further behind their European counterparts in “climate reporting and preparation” at financial institutions, Moody’s Analytics warned in a study last year.

In the U.S., S&P Global Ratings has begun to measure climate risk exposure when making credit ratings. Meanwhile, President Joe Biden has pledged to increase efforts to curb greenhouse gases, despite a recent Supreme Court decision limiting his authority to do that. His recently enacted climate and health care bill provides billions to promote a greener economy.

European Pension Regulator Launches Climate Risk Stress Test for 2022

UK Pension Plans Lag Behind in Climate Change Plans

Tags: bank earnings, climate stress test, energy prices, European Central Bank, European Insurance and Occupational Pensions Authority, greenhouse gas, heat, Joe Biden, rainfall, S&P Global Ratings, US Supreme Court

In the estimation of some economic observers, today’s Federal Reserve should heed the wisdom of Paul Volcker, who led the Federal Reserve during the last great bout of inflation. That is, don’t waver in the fight against spiraling prices, even in the face of an economic downturn—as that stance, argued PIMCO’s Tony Crescenzi in a recent post, is why Volcker was successful. In today’s Wall Street argot, Volcker didn’t “pivot.”

Volcker, during his turbulent tour as Federal Reserve chair (1979 to 1987), is viewed by many as the economic savior who defeated debilitating double-digit inflation. This was an exercise in tough love, to say the least. His relentless push to raise interest rates touched off two recessions.

But a key part of his success was that he didn’t back down from his campaign—and killed off the prevalent public notion that more inflation was inevitable, Crescenzi argued in a post on LinkedIn.

Crescenzi, a strategist for the asset manager and its executive vice president, castigated the current hope of many in the financial world that the Fed, now embarked on a steady program to elevate interest rates, will reverse course. That is, pivot.

Volcker’s example “should cast doubt on any notion of a quick about-face in Fed policy that results in rate cuts in 2023,” Crescenzi wrote. Volcker, he added, “understood the importance of inflation psychology and of combating the public’s perceptions about high inflation with bold action.”

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To Crescenzi, the current Fed head, Jerome Powell, is in Volcker’s unrelenting mold. “Powell is almost certainly aware of the lessons that Volcker provided, in particular the importance of taking actions that constrain the pervasive influence of unstable inflation expectations,” Crescenzi opined.

In Crescenzi’s view, the Powell Fed’s plan for next year involves attaining a “positive real federal funds rate,” meaning the central bank’s benchmark rate will exceed inflation. Right now, it is some 6 percentage points below the Consumer Price Index.

There are other Volcker-esque tactics the Fed should follow, he declared. One is “hesitance to lower the funds rate when the inflation rate declines.” Another is not returning to bond buying.

Some have criticized the Powell Fed for not moving sooner to tackle inflation, now running at 8.5%. But to make up for lost time, Powell is taking advantage of a gift Volcker gave him: faith in the Fed. People now believe that the Fed can and should conquer high inflation, the PIMCO executive noted.

Quoting Volcker, who died in 2019, Crescenzi wrote: “Vacillation and procrastination, out of fears of recession or otherwise, would run grave risks.”