Climate Risk Stress Testing

An EBA Workshop on Climate Risk Stress Testing was held at the beginning of February whereby the objective of the workshop was to collect feedback on the challenges being faced by practitioners and to discuss options on how to adapt current stress testing frameworks to accurately assess the effects of climate-related risks on the banking sector. It was noted the banking industry will play a very important role in financing the transition to a net-zero or less carbon incentive and while banking supervision had to remain risk-based, it had to factor in the role that banks have to play in financing the transition.

Specific reference was made to the Network for Greening the Financial System (NGFS) which consists of members from central banks and financial supervisors with the objective of accelerating the transition towards green financing and publishes recommendations and guidelines for supervisors, including on climate risk. In this regard, last autumn the NGFS published the third edition of the climate scenario analysis which presents an update on the scenarios for the assessment of climate risk.

The work shop also included the following key aspects for stress testing in general:

• identify the key questions for each exercise as often stress tests try to do too many things at the same time;
• be clear about the key assumptions and limitations;
• fit the exercise within the broader context of climate related exercises, which is a rapidly growing field;
• devote special attention to the transmission from the climate/environmental dimension to economics/finance.

The Boundary between Trading Book and Banking Book

On 27 February 2023, the EBA published a no-action letter in the form of an opinion, outlining that competent authorities should not prioritise any supervisory or enforcement action in relation to the boundary framework.

The CRR2 introduced specific provisions on the boundary framework which shall be applicable from 28 June 2023. While both the EU Council and the EU Parliament agreed to postpone the application date of the boundary framework as part of the ongoing legislative process amending the CRR2, however, such efforts will not be fruitful if the legislation process ends after 28 June 2023. Thus, in order to avoid a fragmented two-step implementation of the boundary framework, which is operationally complex in nature, the EBA published this no-action letter in relation to supervisory and enforcement actions.