Interview with Le Monde

Interview with Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, conducted by Eric Albert

25 July 2024

Your job is to supervise banks to ensure financial stability. Climate change is of great concern, but what impact does it have on financial stability?

There are two types of risks: physical risks and transition risks. The physical risks are obvious: wildfires, floods, droughts, etc. If you are a bank and you are exposed to homes built in flood-prone areas, this has a bearing on your credit risk. If you are exposed to homes built in areas prone to forest fires, and insurance companies are increasingly unlikely to cover these losses, your credit risk will increase.

And there are also transition risks. The good news is that governments are not simply standing by in the face of global heating, but are committed to an orderly transition to a net zero economy. This also leads to risks for banks. For example, if you finance manufacturers of cars with combustion engines and this technology is banned in the future, you are exposed. Banks therefore need to monitor these companies and make sure they have a transition plan in place that complies with the new legislation.

In confronting these risks, what is the ECB asking banks to do?

We initiated a conversation with banks in 2019. Fewer than 25% of them had worked on climate-related risk management. That was clearly not enough. In 2020 we therefore published our supervisory expectations on climate-related and environmental risks – in other words, how banks should assess their risks in this area – with a final deadline set at the end of 2024.

Just to clarify, as a supervisor you are asking banks to simply identify risks. So you are not asking banks to green their policies?

Exactly. I have often said in my speeches that we don’t make climate and nature policies. That is up to the politicians: they are elected, we are not. Our mandate is not to draft policies on climate or nature, but to ensure that banks are safe and sound. To do so, we need to make sure that banks manage all their risks, whether cyber, geopolitical or climate-related. Banks may therefore keep on financing companies that emit high levels of greenhouse gases, but if they do so, they need to manage the related risks.

Against this background, how much progress have banks made in assessing their climate-related risks?

In 2021 we asked them to carry out a self-assessment. They reported that 90% of their practices were only partially or not at all in line with our expectations. In 2022 we ourselves carried out a thorough assessment across the banks and came to the conclusion that the glass was filling up, but that it wasn’t yet half full. We asked the banks to speed things up and we set some interim deadlines. The first of these was in March 2023, by which time we wanted all banks to have conducted a materiality assessment.

Following on from that, in November 2023 you announced for the first time that you would impose periodic penalty payments on those banks that had not carried out this assessment. What is the current state of play?

By March 2023 most but not all of the banks had met our requirements for the first interim deadline. For 22 of them we issued decisions with binding requirements, including the possibility of being charged daily penalty payments. These banks were granted additional time – until spring 2024 – to complete the materiality assessment as required before the accrual of periodic penalty payments.

That was several months ago. Can you give us an update?

What I can say publicly is that most but not all of the 22 banks complied with our requirements.

Does that mean that a handful of them were charged periodic penalty payments?

I can’t answer that question yet because the process is ongoing. The banks have a right to be heard, and that takes time. I hope to be in a position to announce the outcome later, either at the end of this year or the beginning of 2025. Meanwhile we are also assessing where banks stand in relation to our further requirements, which go a step beyond the materiality assessment we have been speaking about. We will basically follow the same process in this case.

How high might the periodic penalty payments be?

The law states that you can go up to 5% of the bank’s average daily turnover per day of infringement up to a maximum period of six months. But that’s a maximum. The ECB exercises its discretion to determine what is proportionate in each specific case.

Some accuse you of not going far enough in the fight against global warming. In April Emmanuel Macron suggested that the ECB should “at least have a growth objective, or even a decarbonisation objective”. How would you respond to that?

I’m a trained lawyer, and the one who receives the mandate is not the one who decides on the mandate. That is for others to decide. I would just like to say that the Treaty [on the Functioning of the European Union] very clearly stipulates that our primary objective is to ensure price stability. But we also have an explicit secondary objective which says that, without prejudice to that primary objective, we shall contribute to the general economic policies in the EU, which include climate policies.

Within our mandate, we have already done quite a lot of things: we have tilted our corporate bond purchases towards green companies and we are in the process of decarbonising several of our portfolios. If we started drafting climate policies, that would be illegal and we would endanger our credibility. But we shouldn’t underestimate what we can and in fact must do within our mandate.