Interview with Bloomberg TV

Interview with Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, conducted by Francine Lacqua, Bloomberg TV, on 2 November

3 November 2021

Frank Elderson, thank you so much for joining us here on Bloomberg. Some very exciting commitments from banks; how do you look at what we've heard today?

Today the Central Banks and Supervisors Network for Greening the Financial System, the NGFS, has come out with the Glasgow Declaration: “Committed to action”. This means that the now 100 – today actually we reached 100 members – central banks and supervisors around the world have committed to a number of actions.

Which means what exactly? What kind of concrete actions are we expecting? There's a lot of talk. If you're a bank today, how should you be looking at this?

What we have committed to, for example, is to do work on the data gaps – and I can explain a little bit more – work on monetary policy, work on capacity building, work on some issues that have been worked on a little bit less, such as litigation – climate litigation is also something that is increasingly apparent – and biodiversity loss. I think that in terms of monetary policy, data, capacity building, biodiversity loss and litigation, there are a number of very clear commitments that our membership has now signed up to.

If you look at data, what's the right data point for banks to look at how their clients emit? Where do they look for it and where do they find it?

It's very good that you bring up this subject because data are absolutely key. We do visit banks and some banks will just tell you that there are not enough data. There are a lot of data but they are difficult to find. One of the commitments that we have put in our declaration that we issued today is that we will come up with a data repository, so a place where banks, where financial institutions more generally can go to and find, in an easy way, in a way that is continuously being updated, the various data sources that are there in order to help them to manage their climate-related and biodiversity loss-related financial risks.

The ECB told banks late last year what they can expect in terms of climate stress tests. Have you since told them to fix the glaring issues?

We have a very clear roadmap. Last year we came out with a guide with regulatory supervisory expectations. We asked the banks to actually come to us in terms of self-assessments, and they have done so. There is bad news, and that is that 90% of the banks that are under our supervision, self-assessed as not living up entirely to our expectations. Now, part of that plan is also a microprudential stress test that we will do next year. And there it is very important that banks develop this technology, this method, in order to be able to gauge these risks going forward.

Which type of bank did worse in those kinds of stress tests?

Well, you cannot really say. Let me turn this question around: you could see that there were good practices among different banks, different business models and different geographies. Actually, what we have been seeing is that it is possible to live up to our expectations because we have seen banks that are different living up to them. But too many don't do so yet, so we are very much intent on making sure that they will in the near future.

By doing that indirectly, will it raise their capital requirements and will it do so already this year?

What we have said is that the microprudential stress test that we will run next year – and the methodology of which we published a very short time ago – is to a certain extent still a learning exercise. A learning exercise for the banks but also for us as the prudential supervisor. What we have said is: this is not yet about capital. It could be that, if we see very egregious examples, in an indirect way this might affect their scores under Pillar 2; this is rather technical. But this is not what this is about this time.

When you look at some of what we're expecting from COP26, what are you most excited about? I know you've laid out some of the things and some of the great work that you've helped achieve. What does it mean for the big chief executives of banks today? Can they still lend to companies that pollute a lot?

Four years ago, there were eight central banks and supervisors that founded the NGFS. Now there are 100. This means that 100 central banks and supervisors around the world are wielding their leverage on the banks that they supervise. All global systemically relevant banks are under the supervision of members of the NGFS. Two-thirds of the big insurance companies are under the supervision of members of the NGFS. That means that when we say that we’ve come up with these commitments, it means that every CEO of every bank, of every insurance undertaking, will notice that. They will have to think very seriously about how they will manage their climate-related and biodiversity loss-related financial risks.

At the moment, given your conversations are a lot about banks, do you see tension between the chief executives and maybe some of the chief sustainability officers that sit on the board?

I would say that a bank having a sustainability office is so 2011! We now need banks – and this is what our expectations are all about – to really incorporate this in their very DNA, in their business models, in their management information systems, in their risk management. For a bank, this is not some kind of a fringe, this is core.

But are they cutting off clients in the polluting industries enough, and when will this accelerate?

I want to celebrate the fact that many banks are now signing up to the GFANZ – the Glasgow Financial Alliance for Net Zero. Banks are voluntarily entering into net zero commitments. Now, what we are saying, and what I've been pleading for also personally, is that it is of course wonderful that there is a voluntary initiative, but this should be made mandatory. My point would be that I would very much welcome in the new package of the European Commission that, at least in the European Union, there be a clear mandatory legal requirement for banks to have Paris-compatible transition plans so that we can easily supervise their alignment with the Paris Accord.