Prudential transition plans: what’s next after the adoption of the Capital Requirements Directive?

As the European economy decarbonizes, economic assets across sectors are at risk of stranding or repricing from transition pressures. Yet private financial institutions, particularly banks, often narrowly focus on fossil fuel credit losses using historical data, underestimating broader ‘whole of economy’ stranding risks. Risk mitigation in the form of prudential capital buffers and loss provisions […]

The implementation of the new banking package (or Capital Requirements Directive package) that adopts the final parts of the international Basel 3 financial regulation is underway in the European Union. The European Banking Authority (EBA) along with the other European Supervisory Authorities (ESAs) is mandated to develop technical standards that provide the framework to help financial institutions comply with the new regulatory rules. Key among these standards is the novel guidance on ESG risks which is expected to be finalised by the EBA in the coming months. This is an opportune moment to address weaknesses in banks’ risk management practices, particularly regarding the underestimation of stranded asset risks, a missing angle in current policy debates.  

Following the European elections on June 9, the EU is adapting to a new, more conservative, political reality. Yet despite changing political tides, a new EU leadership will still need to find a credible answer to how the continent is to reach climate neutrality by 2050. To understand how to get there, we need a clear understanding of the progress already made. This is where the European Climate Neutrality Observatory (ECNO) comes in.