EU's Climate Crisis Regulations... European Banks Express Concerns Over Gap with the US

European Banks Must Reflect ESG Risks
European Banking Industry Opposes, Saying "US Is Withdrawing"

As European financial authorities sharpen ESG (Environmental, Social, and Governance) regulations targeting local banks, industry backlash continues. Going forward, banks within Europe will have to reflect ESG risks related to the climate crisis in their loan loss provisions, complicating capital management variables. The European banking sector fears that the competitiveness gap with US banks will widen significantly.

According to Bloomberg on the 7th (local time), the European Central Bank (ECB) is currently drafting regulations for managing banks' ESG risks. The European Banking Federation (EBF), which represents European banks, stated, “If new regulations are introduced, European lenders could fall irreversibly behind their US competitors in terms of competitiveness.”

Following the European Banking Authority’s (EBA) outlook that “climate crises and other factors could pose new threats to financial stability,” the ECB is preparing regulations requiring lenders to disclose ESG risks, including loan loss provisions. For example, banks must account in advance for potential defaults by corporate clients due to carbon emission regulations or rising natural resource costs. The ECB has also warned that it will impose fines on some lenders who do not take ESG risks seriously in the future.

The ECB expects that through these measures, the banking industry will develop the capacity to cope with upcoming ESG risks.

Some European banks have already started reporting such loan loss provisions. Dutch banks like Rabobank and ING are proactive. Rabobank announced last month that it set aside 13.6 million euros in ESG provisions last year. Rabobank explained to Bloomberg, “This fund is intended to prepare for potential chronic climate events such as future floods or droughts.” ING also reported including ESG risks in its loan loss provisions.

However, a significant portion of the European banking industry is strongly opposed. They argue that requiring banks to set aside financial reserves for risks that are difficult to quantify is unfair. Denisa Evermate, Sustainable Finance Policy Advisor at the EBF, said, “If these requirements proceed before the prudential framework for climate risks is fully reviewed, there is a possibility of double counting.”

Concerns also arise that the competitiveness gap with US banks will widen further. According to Bloomberg, the market values of US banks JP Morgan and Morgan Stanley are 1.9 times and 1.7 times their book asset values, respectively, whereas European banks BNP Paribas and Deutsche Bank stand at only 0.7 times and 0.5 times. Particularly in the US, recent Republican-led opposition to ESG has repeatedly nullified planned rules and guidelines. If European banks reflect ESG risks in their accounting, the gap is expected to widen further.

European financial authorities have expressed their intention to thoroughly incorporate industry feedback. The EBA is collecting opinions from the banking sector until the 18th. The final draft is expected around the end of the year. The EBA stated, “Efforts to manage ESG risks among banks in Europe are still at an early stage,” and explained the reason for introducing the regulations, saying, “Lenders are currently too insufficient to ensure prudential soundness during the European Union’s transition to a more sustainable economy.”