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The European Banking Federation says lenders in the region won’t be able to compete with their US rivals if regulators continue to pile on ESG rules that Wall Street remains free to ignore.
The warning from the bloc’s main bank lobby comes as the European Central Bank puts pressure on lenders to capture environmental, social and governance risks, including in loan-loss provisions, marking a new frontier in ESG reporting standards.
The ECB is looking for evidence that banks can cope with losses stemming from what it calls “emerging risks,” which include clients’ carbon emissions and rising costs associated with consuming natural resources. The exercise comes after a 2023 review concluded that the vast majority of banks in the region are unprepared.
It’s the latest sign that regulators in Europe are moving along a different trajectory than their counterparts in the US. In the EU, banks now face ESG-adjusted capital requirements, more disclosure rules and the possibility of an explicit climate buffer, all of which regulators say will ultimately equip the sector to deal with the risks ahead. In the US, meanwhile, planned rules and guidelines are being walked back against a backdrop of Republican-led opposition to all things ESG.
Denisa Avermaete, senior policy adviser for sustainable finance at the European Banking Federation, says ESG buffers are problematic because they’re an “exclusively European tool.”The EBF, which is the umbrella organization for Europe’s banking associations, is concerned that banks will be required to set aside financial reserves for risks that remain hard to quantify before getting clear regulatory instructions, Avermaete said. So proceeding with such requirements before “the prudential framework is fully reviewed for climate risk” opens the door to “double counting,” she added.
Banks in Europe are already falling behind their US peers in investors’ perceptions. JPMorgan Chase & Co., the largest Wall Street bank, has a market value that’s 1.9 times the value of the assets on its books, according to data compiled by Bloomberg. Market pricing shows investors think Morgan Stanley is worth 1.7 times its book value. Meanwhile, BNP Paribas SA, the EU’s biggest bank, has a price-to-book valuation of 0.7, meaning investors think it’s actually worth less than the value of its assets. Deutsche Bank AG’s price-to-book is even lower, at just 0.5...
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