The way towards banks’ good climate change risk management

European Central Bank

“The Pillar 1 framework is currently being examined to identify whether it adequately addresses climate-related and environmental risks.” This is a quote of Anneli Tuominen (ECB Supervisory Board member) in a speech to the Banking Union a few days ago.

This is a new step taken by the European Central Bank to fully address the climate change issue both from a transition risk and physical risk point of view, both being so present today.
Moreover, Anneli Tuominen states that ‘we need to bear in mind that climate-related and environmental risks are forward-looking by definition and the reliance on historical data may affect the risk measurement which could require the consideration of new tools to complement the existing Pillar 1 framework.’

It is precisely the point of the CERM model to tackle that issue through a forward-looking modelisation of climate risk and integration into the IRB framework.
Hence the CERM could be used to assess the Net Zero trajectory of a bank’s banking book.

We look forward to following the ECB’s progress in that examination.
Note that this decision is almost concomitant with the EBA public consultation over Pillar 1 kicked off over the summer.

Climate-Extended Risk Model (CERM)


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