ECB to Impose First-Ever Fines on Banks for Climate Failures

The European Central Bank is set to take the unprecedented step of imposing fines on several lenders for their protracted failure to address the impact of climate change.

Bloomberg
First Published29 May 2024
ECB to Impose First-Ever Fines on Banks for Climate Failures
ECB to Impose First-Ever Fines on Banks for Climate Failures

(Bloomberg) -- The European Central Bank is set to take the unprecedented step of imposing fines on several lenders for their protracted failure to address the impact of climate change.

As many as four lenders face penalties after not meeting deadlines set by the ECB for assessing their exposure to climate risks, according to people familiar with the matter. The amounts aren’t final yet and may be largely symbolic, the people said, who asked not to be named as the move isn’t public.

A spokeswoman for the ECB, which directly oversees more than 100 banks, declined to comment.

The imposition of fines still marks an unusually harsh step toward forcing banks to comply with the ECB’s views on how they should manage climate risks. The move comes after years of pressure, with former banking supervision head Andrea Enria stating in a September interview with Bloomberg that the ECB would resort to such sanctions as an alternative to higher capital requirements.

Read More: Top ECB Bank Watchdog Outlines Biggest Revamp Yet as Tenure Ends

The fines rack up every day and can amount to as much as 5% of a lender’s daily average revenue. For a bank with annual revenue of €10 billion ($10.9 billion), for example, that would suggest daily penalties of as much as €1.4 million in the toughest scenario, although the actual fines imposed may be much smaller.

The banks singled out for penalties are now accruing daily fines for as long as the deficiencies persist, the people said. Mitigating factors may be taken into account as well, meaning some fines could be reduced or even negated, said one of the people. 

The ECB has repeatedly warned that lenders aren’t doing enough to prepare for the fallout of extreme weather shocks on asset values, or the risk that clients with big carbon footprints might go out of business. The watchdog has said it initially threatened 18 banks with penalties, implying that ECB pressure is leading to results for most firms.

European regulations require banks to assess whether they are — or will be — exposed to material risks, and that they reflect that in their capital reserves. The ECB has said lenders typically need to understand all the relevant drivers of climate and environmental-related risk and how these are affected given their exposures. 

The rigor with which the ECB is pushing banks to manage their climate risk stands in contrast to the approach taken by the Federal Reserve, with Chairman Jerome Powell saying the Fed has “narrow, but important, responsibilities regarding climate-related financial risks.” Banks in Europe have warned that the schism in regulatory environments risks putting them at a competitive disadvantage to their US peers.

Read More: Fed Blocks Tough Global Climate Rules for Wall Street Banks 

Frank Elderson, a member of the ECB’s Executive Board, has shown little inclination to slow down European efforts on climate. In a May 8 blog post, he wrote that “a materiality assessment is not just a ‘nice to have’ — knowing your risks is a precondition for being able to address them.” 

While some banks have started to set aside capital to cover climate-related risks and improved their risk management, Elderson listed several deficiencies, including: 

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.

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