06 October 2022

EURACTIV: Top EU banks exposed to $239bn in fossil fuel assets

A new report published by Finance Watch unveiled the exposure of EU banks to fossil fuel assets and called for higher capital requirements to ward off the financial stability risk of stranded fossil fuel assets.

The report, published on Tuesday (4 October), analysed the balance sheet of 60 large global banks, including 22 EU banks, based on data from 2021.

In total, the report estimates that the 60 banks hold fossil fuel assets of around $1.35 trillion. Of these, $239 billion are held by EU banks. These are credits the banks have doled out for existing fossil fuel activities.

In Europe, the six French banks covered by the study are most exposed to fossil fuel assets, sitting on $142.3 billion, which accounts for 1.31% of their total assets. The four German banks, meanwhile, are relatively less exposed with fossil fuels comprising $22.8 billion, or 0.74% of their total assets. The five Italian banks in the study have fossil fuel assets of $16.9 billion, or 0.61% of their total.

On average, the EU banks are slightly less exposed than US banks, with 1.05% of total assets exposed, compared to 1.28%.

Financial stability risk

While the percentages of fossil fuel assets might not appear overwhelming, the NGO Finance Watch argues that they pose a risk not only to the climate but to financial stability. As the economy has to transition away from fossil fuels, there is a risk that fossil fuel companies get into payment difficulties and that fossil fuel assets become stranded.

Moreover, Finance Watch secretary general Benoît Lallemand argued that fossil fuel assets increase the macro risk of climate change-induced economic disruption. “Anytime you invest in fossil fuels, you are increasing the risks,” he told EURACTIV.

According to Lallemand, current capital requirements for banks artificially subsidise the fossil fuel industry because climate risks are not properly taken into account.

Today, banks often back fossil fuel assets with only little capital, since fossil fuel companies benefit from good credit ratings that do not take into account climate risks.

“This artificially reduces the cost of capital for fossil fuel companies,” Lallemand said.

Higher capital requirements for fossil fuel exposures?

That is why Finance Watch argues that banks should back exposures to existing fossil fuel assets with more capital. The NGO argues for a risk-weight of 150%, meaning that every loan given to companies for existing fossil fuel activities would have to be backed by 12% of capital.

Currently, these capital requirements for banks are under review. Last year, the Commission proposed a change to the EU’s bank capital requirements rules last year to bring the EU’s banking regulation up to speed with the international Basel III framework.

EURACTIV

© EURACTIV