ECB Issued Supervisory Priorities for 2023-2025
The European Central Bank recently released a report describing the regulatory priorities from 2023 to 2025. ECB believes that changes in global macro financial conditions have imposed greater uncertainty on the European economy, especially on the banking sector. The current situation has required the regulatory authorities to consider developing a prudential regulatory framework. The European Central Bank, together with other institutions, has studied and formulated regulatory matters for the next three years, which are:
- Improve the robustness of the banking industry in the change of macro financial conditions. This involves the credit risk faced by banks, such as the bank’s business with some industries vulnerable to global financial conditions, and the bank’s funding risk, that is, the bank may lack diversified financing methods and plans;
- Strengthen the digital transformation and governance capacity of the banking industry. ECB believes that the business model of banks will turn to digitalization in the future and banks also face risks in information technology and networks. At the same time, the risk management mode of the bank is directly related to the governance capability and data integration;
- Emphasize the climate risks faced by the banking industry. ECB believes that the banking sector needs to take into account the risks of climate change and environmental factors. They are no longer long-term or emerging risk types, but are currently having an important impact on the banking industry;
Incorporate Climate Risk into Priority Regulation
The European Central Bank believes that the banking industry needs to incorporate climate and environmental risks into business decisions. The climate stress test from 2022 shows that the profitability of the banking industry is still obviously dependent on some high emission industries, and there is a certain difference from the goals set by the regulatory authorities. This involves data processing, risk preference setting, business restrictions and other aspects. The European Central Bank hopes that the banking industry can improve the risk framework by the end of 2024.
ECB said that the subsequent regulation of climate risk will focus on the following aspects:
- Deeply dive on climate stress test to find the risk weakness of the banking industry;
- Reexamine the compliance requirements and disclosure contents of the banking industry on climate risk;
- Analyze the reputational and litigation risks of specific banks due to climate risk;
- Prepare for the supervision of bank transformation framework and ESG related disclosure;
- Measure various risks arising from climate change;
References:
ECB Banking Supervision: SSM supervisory priorities for 2023-2025 (europa.eu)
