EBF Response to the BIS discussion paper on the role of climate scenario analysis in strengthening the management and supervision of climate

17 July 2024

The European banking sector generally supports the BIS’s efforts to establish common guidelines for CSA and Climate Stress Testing, which will help align supervisory practices globally.

The European Banking Federation has recently submitted its response to the Bank for International Settlements (BIS) discussion paper on the role of Climate Scenario Analysis (CSA) in managing and supervising climate-related financial risks. This alignment will ensure consistency in risk analysis while allowing for adjustments based on specific institutional risk profiles and regional differences. 

The EBF response to the discussion paper highlights several key points:

• Alignment and Flexibility: Harmonized guidelines are crucial for global consistency, but flexibility is needed to tailor practices to individual institutions’ risk profiles and business models.
• Dynamic Field: CSA practices will evolve rapidly with advancements in climate science, necessitating regular updates to guidelines through collaboration with banks and supervisors.
• Challenges and Solutions: The EBF identifies challenges such as data limitations, scenario granularity, and scenario consistency. To address these, the EBF suggests developing more granular scenarios, providing guidelines to fill data gaps, and enhancing collective data infrastructure.
• Key Areas for Development: Improvement is needed in scenario design, particularly for short/medium-term scenarios and sector-specific physical risks. Clear objectives for scenarios and better data on transmission channels are also essential.
• Methodology and Capabilities: The EBF emphasizes the need for clarity in scenario objectives and the importance of sector-specific and geographical scenario details to limit the need for internal modelling by banks.
• Prudential Objectives: CSA should be integrated into risk management processes and capital assessments, focusing on material risks. It should also be used strategically for long-term business model resilience.
• Standardization and Innovation: While standardization enhances comparability, it should not stifle innovation in CSA design. Guidance should balance standardized methodologies with the flexibility to account for idiosyncratic risks.

Overall, the EBF’s response underlines the importance of continuous development and international cooperation in CSA to effectively manage climate-related financial risks.

EBF

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