Interview with Expansion, Handelsblatt, Il Sole 24 Ore, Les Echos

Interview with Claudia Buch, Chair of the Supervisory Board of the ECB, conducted by Isabella Bufacchi, Thibaut Madelin, Yasmin Osman, Andres Stumpf

5 November 2024

We are here because it has been ten years since banking supervision became European, and now we have a more robust set of banking rules. What improvements has European banking supervision brought compared with what we had before? We’ve seen some statistics, and despite the existence of European banking supervision, around 90% of on-site inspections, which are the tools that help supervisors make most findings, are still led by national authorities. What has changed?

Following the global financial crisis and the sovereign debt crisis, the European Union responded in a united and strong way by giving more power to the European level for the supervision of the largest banks, thus establishing European banking supervision. The banking union is also about ensuring that bank failures can be managed better and without using taxpayers’ money. Before the crises, there was no bank resolution framework.

European supervision means that we have the same rules that apply to all banks and that we can look at all banks in a unified way, share information and benchmark the banks. This allows us to identify outliers and best practices. This is a significant improvement because national supervisors can look mainly at the banks in their countries.

Resilience has increased, not just thanks to us, but also because of better regulation and the work done by the banks in strengthening risk management. It’s also important to note that past shocks, like the COVID pandemic and the energy crisis, have been buffered by other policy areas, particularly fiscal policy. This is something to be factored in when doing forward-looking assessments of banks’ resilience.

Bank profitability has increased, mainly due to increased interest rates. But higher profits may not be sustainable. Banks should thus use the opportunity of higher profits to improve their financial and operational resilience, invest into IT infrastructure and cyber resilience. Supervisors can never be complacent, especially in the current risk environment with heightened geopolitical and climate risks. It's crucial to pay attention to these risks and strengthen bank resilience.

Regarding on-site inspections, around 80%-90% of inspectors indeed come from the national competent authorities. For Joint Supervisory Teams, about one-third of the colleagues are from the ECB, and two-thirds from the national authorities, with the team leaders always coming from the ECB and not from the country of the supervised bank.

So why is it different for on-site inspections? It's a matter of efficiency. We have many qualified and knowledgeable colleagues in the national competent authorities, so it makes sense to leverage on their expertise. But here, too, we ensure an unbiased approach in our supervision. For example, when a mission is “cross-border”, that is when the on-site team inspects sites in multiple countries, the head of mission is always from a different country than the one where the bank is located. We strive to be as efficient as possible with our resources and ensure that we have a consistent inspection process across countries.

For some countries in Europe, regulation might have gone too far. How do you think the ECB and European authorities should respond to the demands from France, Germany and Italy to ease banking regulations? Additionally, how should Europe react if Donald Trump gets elected? Should Europe implement the full Basel III rules?

First of all, I wouldn’t say that supervision and regulation have gone too far or are overly conservative. Better resilience in the banking system means more capital, more liquidity and improved operational resilience. The new rules, decided upon after the global financial crisis, have led to better resilience. Many studies show that the post crisis regulatory reforms have not hindered lending to the real economy. Also, better and more intrusive supervision has positive implications for banks. Banks with higher capital can actually bear more risks and lend more to the economy, especially in times of crisis. This is why banks need to build up buffers so that they can continue lending, also during difficult times.

It’s important to remind ourselves why regulation and supervision is complex — it actually reflects the complexity of modern banking. But clearly, complexity is often the result of long negotiations among Member States during the European legislative process and input received during industry consultations. Any unnecessary complexity should be reduced — but without compromising resilience.

In the SSM, we contribute to this. We are reforming our supervisory approach to make it more risk-based, targeted and consistent across different activities. This reform makes supervision more efficient — but also more intrusive: we will follow up upon our findings faster.

And then Basel III is an important case.

Yes, absolutely. Basel III is a core element of post-crisis financial reforms. Many studies show the benefits in terms of resilience, with no significant negative side effects. The banking package, which is implementing Basel III in Europe, has been negotiated and should be implemented as planned, on January 1^st 2025. The increase in capital requirements would be about 8-9%, which is only half of the impact that the rules agreed in Basel would have implied. Such impact is manageable given that the phase-in period lasts until 2032, which is 25 years after the global financial crisis. This timeline provides ample time for the sector to adjust. The banks currently have sufficient capital headroom, so I don’t expect any negative impact on the real economy.

Should we implement Basel III regardless of what the United States does, even considering the Fundamental Review of the Trading Book there?

Yes, Europe should implement the Basel III framework — we need a strong institutional framework for resilient international banking markets. We have compared current capital requirements in the United States with those in Europe. A hypothetical exercise shows that applying the current US capital requirements would actually lead to higher requirements for European banks.

So our banks are not at a disadvantage?

No. Not all European banks actually compete directly with all US banks; competition occurs in specific markets. Capital requirements are just one factor among many. On average, US capital requirements are higher, in particular for globally systemically important banks and because of the less frequent use of internal models in the United States. For domestically systemically important banks, European requirements are slightly higher. Most of these banks do not compete on global markets but locally.

Currently, there’s a significant focus on the potential first cross-border merger within the remit of European banking supervision. Many ECB members have spoken about it indirectly, and German supervisors have criticised the ECB, suggesting it supports the UniCredit-Commerzbank merger. Do they have a point?

First, I don’t discuss specific banks publicly. Everything I say pertains to our cooperation among supervisors and our role generally. No one has mentioned this criticism to me.

This was mentioned at a press conference on the Less significant institutions, where your successor at the Bundesbank emphasised the importance of proportionality in regulation. He suggested that ECB members support cross-border mergers openly.

We cooperate very well with German authorities and supervisors. There is no disagreement on our role. Article 23 of the Capital Requirements Directive gives us clear criteria for assessing mergers, which do not differ based on whether the merger is domestic or cross-border. We evaluate indicators such as the financial situation of the acquirer or the prudential ratios. We follow these criteria strictly, and there is no disagreement on the application of these rules.

So talking about or supporting cross-border mergers in general doesn’t imply support for any specific merger.

I talk about cross-border mergers in general. Cross-border mergers are one way for banks to respond to increased competitive pressure. More non-bank providers of financial services have been entering the market. This, together with digitalisation, adds competitive pressure on banks. Entering another market with different business cycles and industry structures can offer diversification benefits. However, history shows that these benefits or synergies don’t always materialise, and that there are risks, for instance related to integrating IT systems or additional management complexity. These risks can arise domestically and in cross-border transactions. We are therefore neutral when it comes to domestic versus cross border transactions. We stick to the clear criteria to assess mergers, while recognising the potential benefits and risks of cross-border diversification.

And would you support a takeover without the political support of the home country of the target?

Again, this is not something we consider. We have our criteria, and they clearly guide us on what to look at. Our mandate is to consider what’s happening in European banking markets, and we are accountable to the European Parliament. This is what drives our decisions.

So, to summarise, you support large European banks for diversification reasons?

As I said, banks must respond to the changing risk environment and the new competitive landscape. They can do this in different ways: they can grow organically, merge with other banks, in the domestic market or abroad. It’s not our role to prefer one strategy over another. We assess whether the entity that would result from a transaction meets prudential ratios on a sustainable basis.

The impact of bank size on financial stability is actually not clear-cut. Big banks can be too big to fail, hence a lot has been done since the global financial crisis to better regulate and supervise big banks to address systemic risks. But many small banks exposed to the same risk can also pose risks to financial stability. This is where macroprudential policy comes in to address financial stability risks.

Does the political challenge of these mergers, whether in Germany or Spain, if the government opposes them, create a new risk that the ECB takes into account?

Again, it’s not for us to assess what national policymakers say. We have a very clear list of criteria. These criteria are outlined in our guide on consolidation from 2021. The document details the different types of qualifying holding applications and the information we need to evaluate them. It explains our role and what falls under our mandate, especially to answer questions about what’s within our scope and what isn’t.

I think we should focus on one of the criteria you mentioned: the prudential ratios and their implications. There’s a qualitative element to the quantitative aspects. It’s often argued that the ECB’s stance on capital requirements for a new bank can influence the cost of mergers. Even if you remain neutral, your decisions impact the new bank. Can you explain how the ECB’s role might affect the feasibility of mergers?

When I say neutral, I mean we don’t favour or oppose specific strategies for banks to adapt to the new environment, whether they are cross-border or domestic mergers, among other options. We are neutral in that sense. However, we are not neutral regarding prudential requirements and risk assessments. We evaluate whether a combined entity meets prudential criteria and has a sound business plan. This applies to all banks, not just those involved in mergers. We look at current prudential requirements and conduct a forward-looking risk assessment. Our role is not to take decisions of management or shareholders but to assess the prudential implications of such decisions.

Do you also consider business plans?

Yes, we assess business plans for all banks we supervise. This is an ongoing and regular process, part of our supervision, not just for mergers or in the context of qualifying holdings proceedings. We receive from banks capital plans over a three-year horizon and evaluate business models as part of our ongoing supervision. If banks fail to meet supervisory expectations regarding business models, governance, capital and liquidity, we can use various supervisory tools to address these issues.

I understand your principles of looking at very specific criteria and maintaining a neutral approach. However, you say you don’t consider the political reaction because it’s not part of your mandate, but surely you consider geopolitical risks. How do you reconcile these? If a bank acquires another one without local government support, wouldn’t that be a geopolitical issue?

Our definition of geopolitical risk is different. Geopolitical risk for us is related to the escalation of war, financial sanctions, or terrorist attacks, to give some examples. We have described this recently in a framework for assessing geopolitical risk. Banking is inherently political, and there are always political discussions around it, but we don’t label these as geopolitical risks.

I understand, but my point is that political reactions in a country will impact the business model and the execution of a merger.

There are many stakeholders in any merger who need to consider various aspects – banks that make offers, or shareholders who accept or reject them. Our regulatory framework provides a clear mandate on what we should evaluate. Article 23 of the Capital Requirements Directive gives criteria to follow. As European supervisors, we are mandated to act without national bias or preferences.

Would you say the takeover of Commerzbank by UniCredit is a hostile approach?

I don’t comment on specific transactions. Our focus is solely on prudential criteria and the outcomes of potential transactions, not on how they came about.

Some companies in Germany are concerned that a merger could lead to a loss of loan providers for the German economy during crises. Would you consider this in your assessment of the merger? Can you ensure that Commerzbank would still provide loans to the German economy in times of crisis?

I must clarify again that I am not commenting on individual banks. When it comes to mergers, we assess them based on prudential ratios and prudential risks. In general, we do not evaluate specific lending decisions made by banks. For example, in our work on climate and environmental risks, we do not say which loans should be granted based on a borrower’s carbon emissions. Instead, we assess how banks manage credit risks associated with these loans.

Is there any authority that would consider the impact of a foreign bank takeover on lending decisions and the prices of lending?

Banks decide where and how they want to lend, and our prudential frameworks ensure that they appropriately consider the risks involved. Of course, it is important to monitor potential unintended side effects of regulation and supervision. But here, the evidence is quite clear: better-capitalised banks have better lending abilities and can better compete for loan customers. During crises, foreign banks sometimes exhibit more stable lending patterns than domestic banks because they have diversified business models. So, the concerns I sometimes hear are not well-founded.

Even the more nationalistic approach of some EU governments doesn’t change the landscape of our integrated market.

There are two dimensions to consider. European banking supervision is strong and solid, and I do not see this at risk at all. Looking forward, many decisions need to be made to make the system even more robust. These include closing gaps in the resolution framework, establishing a European deposit insurance scheme and advancing the capital markets union. We hope policymakers will take decisions in a European spirit.

Aside from Commerzbank and UniCredit, most banking activities occur at a national level in different countries. Isn’t too much national concentration a risk for financial stability, business model continuity and competition?

Let me answer this in several steps. First, impediments to more cross-border integration of banking markets, including lending and deposit taking, are not due to supervision. We apply the same rules to all banks in Europe. However, insolvency legislation and mortgage market regulations, to give some examples, vary significantly across countries, leading to different market structures. For example, Baltic banking markets differ greatly from those in France, Germany or Italy.

The competitive structure of national banking markets varies, and this can pose risks, such as the too-big-to-fail issue or too many banks having the same exposure to the same risk. Therefore, it’s important to have financial stability responsibilities at the national level, with coordination at the European level. National authorities assess risks and take macroprudential measures like imposing countercyclical capital buffers or buffers for systemically important financial institutions. It’s a complex system, but it acknowledges the different banking markets in Europe.

We need a strong macroprudential framework to maintain stability and the ability of the banks to lend also in stress situations. If risks materialise, supervisors may need to tighten rules and ask for more capital. In such situations, we need macroprudential buffer space that can be used.

So let me see if I understand correctly. You will follow your criteria to approve national consolidation and then expect national authorities to address any issues outside the scope of your criteria, such as competition. Is that correct?

Yes, exactly. We are not the competition authority. But other authorities complement our work. National authorities handle financial stability risks since we have institutions of various sizes and systemic impacts. National authorities take care of macroprudential measures and address systemic risks. For example, in the mortgage market, it’s useful to have borrower-based instruments at the national level, given the diverse market conditions. Our role is a microprudential one, while national authorities have responsibility for financial stability. Coordination and top up power at the European level ensures consistency across countries.

Do you think large cross-border mergers would advance the banking union, or do obstacles like fragmented rules on insolvency and consumer protection hinder this progress?

I hope the banking union can advance under the existing proposals without any specific event needing to happen first. We already have common supervision, and non-performing loans have declined – these are two key preconditions for a European deposit insurance scheme (EDIS). Depositors should feel confident about holding their money in any bank across Europe without worrying about protection levels.

It’s essential to address the missing elements now — in particular through EDIS and the crisis management and deposit insurance (CMDI) framework. Past failures of relatively small banks have not fully tested the new system. Also, shocks have been buffered to some extent by fiscal and monetary policies. Now is the time to future-proof the system and ensure all missing components are in place. We shouldn’t wait for the next crisis, we should act now.

So EDIS and CMDI are the most important missing parts to close the gap for the banking union…

Yes, and you might say CMDI can be finalised first. It is about closing gaps in the resolution framework. Basically, it would bring more mid-sized banks under resolution and provide funding for that resolution through existing deposit insurance schemes.

Could you comment on the progress Italian banks have made on non-performing loans and the challenges they’ve faced? With talks about EDIS, it seems Italian banks will face another big challenge: evaluating sovereign holdings and the so-called doom loop. The CEO of Commerzbank, Bettina Orlopp, recently mentioned that before cross-border mergers, we need a completed banking union and EDIS. Do you agree that we cannot move forward with cross-border mergers unless we have both banking union and EDIS? Additionally, is the EDIS not only intended to reduce non-performing loans, but also to address the issue of sovereign bond holdings?

Across Europe, the exposure of banks to their domestic sovereigns has decreased relative to capital, including in Italy. This is positive, as one of the goals of the banking union was to break the bank-sovereign nexus, and this reduction in direct exposures is a step in the right direction.

But there is another, indirect link between banks and sovereign. Before the current resolution mechanisms, including the Single Resolution Fund and the minimum required eligible liabilities (MREL), were in place, national sovereigns provided an implicit guarantee towards domestic banks. This implicit guarantee in case banks realized losses was a major factor behind the bank-sovereign nexus.

With the institutions we have now, like the fully funded Single Resolution Fund, we’ve made substantial progress. However, we still need to address some gaps, such as the ratification of the European Stability Mechanism (ESM) and a framework for the provision of liquidity in resolution. These steps are crucial for mitigating the bank-sovereign nexus.

In addition, EDIS would further weaken the bank-sovereign nexus by diversifying the resources of the deposit insurance fund, thus reducing potential reliance on national sovereigns. Diversification and less dependency on national funds would provide a clear advantage.

At the outset of the banking union, banks held many legacy assets on their balance sheets, leading to the need to first reduce risks. However, non-performing loans have significantly decreased from around 7% to approximately 2% in aggregate, with some countries showing even more drastic reductions.

Can you comment on the performance of Italian banks? What about their sovereign holdings?

Italian banks, like others, are well-capitalised and have reduced their non-performing loans. This is a consistent pattern we observe across countries, although the levels might vary. Italian sovereign holdings are still higher than the euro area average, but they have also decreased relative to capital.

Do you believe sovereign holdings need to be further reduced to facilitate progress in the banking union and EDIS?

From a supervisory perspective, we examine areas with concentrated exposures and take action so that banks address them. Ultimately, policymakers must decide on when to take the next steps regarding banking union. Advancing EDIS would be beneficial as it would further weaken the bank-sovereign nexus. It would add to the progress made with regard to the reduction of direct exposures and the resolution framework.

So, in your view, should EDIS be prioritised?

Again, it’s up to policymakers to decide. However, implementing EDIS would facilitate more cross-border deposit holdings and simplify the tasks of the Single Resolution Board by unifying the deposit insurance systems.

Switching to the profitability of European banks. The rise in interest rates has boosted profitability, but there are concerns about potential increases in non-performing loans due to defaults and arrears. Have we seen the worst of this negative impact, or should we remain cautious?

The strong increase in interest rates over the last few years has certainly improved bank profitability. We’re closely monitoring how quickly these higher rates are being transmitted to deposit and credit markets. The speed varies across countries, depending in particular on whether banks lend at fixed or variable rates.

In countries where variable rates dominate, the impact is felt more quickly, whereas those with fixed rates experience a slower adjustment. This delay benefits borrowers initially but higher interest rates could impact them later. We’re monitoring this carefully.

It’s positive news that banks are more profitable, but we urge them to use this opportunity to strengthen their resilience. For example, the cyber resilience stress tests we conducted this year showed that banks are generally prepared, but that they also need to enhance cyber resilience — which is costly. Banks need to invest in long-term projects like IT system upgrades, which require long-term funding. Balancing short-term shareholder dividend expectations against investments into resilience is crucial for sustainable growth.

Given the time lag in the impact of rising interest rates, do you expect a significant increase in non-performing loans, or do you feel confident that we might avoid such a situation?

We observe vulnerabilities in areas particularly affected by higher interest rates, such as commercial real estate. It’s not just about the flexible rates and bullet loans, but also the shift in demand due to remote work. This risk has been known for some time, prompting us to focus intensely on commercial real estate. We have been working closely with highly exposed banks to understand and mitigate these risks. Recent data show a decline, on aggregate, in non-performing loans, with slight upticks in recent quarters, particularly in commercial real estate and lending to small and medium-sized enterprises.

The future remains uncertain, which is why we are urging banks to consider novel risks such as geopolitical risks in their provisioning practices. It is challenging to assess emerging risks using past data. Our forward-looking approach aims to prevent a significant increase in non-performing loans and ensure banks are resilient to address potential challenges and buffer losses.

Have we seen the peak in banks’ earnings because of the change of the rate cycle?

It’s hard to say. We do not predict interest rates.

You have consistently urged banks to exercise caution, particularly since the pandemic. Despite this, shareholder remuneration is at an all-time high as the banking sector thrives. Do you think the ECB is overly pessimistic, or are firms being too reckless?

It’s not about being pessimistic but realistic, meaning we need to consider future uncertainties. Markets often struggle to assess uncertainties because they price risks on the basis of probability distributions. However, when dealing with general uncertainties, this becomes challenging. We therefore focus on scenario analyses and forward-looking risk assessments. We ask banks to consider adverse scenarios, which can be very specific to each bank, in their capital planning. While we do not forecast scenarios for the banks, we ensure they have proper frameworks in place for this assessment. This is an ongoing annual process. We engage in supervisory dialogues and take measures if we believe a bank’s capital planning is overly optimistic.

Given that you often caution about risks, yet non-performing loans have decreased rather than increased, do you think banks might become more optimistic in the future?

We don’t always sound the alarm; we address risks as situations evolve. For example, climate and environmental risks are long-standing concerns, but when we first asked banks about their consideration of these risks in 2019-20, there were no established frameworks in place. We’ve worked extensively to address these and similar issues like geopolitical and cyber risks. These risks are real. We would all appreciate living in a less risky and uncertain world, but we must remain realistic and maintain clear communications with banks about the implications of various risks.

Higher profits are not only interesting for shareholders but also for states. Many of them want a share of these profits, as seen with banking taxes and taxes on super profits. You've been quite sceptical in the past about banking taxes. How do you see that today, especially with tight public finances?

We have a clear mandate that does not include interfering with tax policy. These decisions need to be taken at the domestic level. The ECB provides opinions on these proposals through the lens of its mandates: monetary policy, supervision and financial stability. We’ve said that if these taxes or tax-like schemes are considered at the national level, there should be a thorough impact assessment to understand the effects on financing conditions, lending and resilience. From a supervisory perspective, our main argument is that investing in resilience is a good use of higher profits.

Based on your experience over the past two or three years, would you say that the lending activity of the banks in those countries has decreased?

It might be too early to tell. Generally, banks have sufficient capital buffers, so there’s no concern that their balance sheet capacity could limit lending. In many countries, lending growth has slowed, but this is also due to higher interest rates and economic uncertainty, which is affecting investment. It’s difficult to determine the exact impact of bank levies on lending without further analysis.

The ECB has threatened some banks with periodic penalty payments due to their deficiencies in climate risk assessment. Have any banks actually paid fines so far? If so, how many? And is it true that a German bank is among them?

First of all, we don’t threaten banks; we use our supervisory tools. Some years ago, we began assessing whether banks were properly addressing climate and environmental risks, taking into account our supervisory expectations, and we set deadlines. At that time, we explained that we would monitor banks’ progress and proceed with enforcement measures if needed. Periodic penalty payments help us to ensure compliance with supervisory expectations related to climate and environmental risks.

There were a few banks that did not meet interim deadlines. These banks were required to overcome their deficiencies in a given timeline, and we assess compliance after the deadline. If they remediate the issues within this period, no penalty payments accrue. If they do not, the penalties will be calculated based on the number of days they remain non-compliant past the deadline. This process is ongoing, and the final decision on whether and how much banks need to pay will be considered in due time by the Supervisory Board. Many banks have shown improvements as they aim to avoid penalties.

The legislator gave us this tool to foster compliance by banks, and it has always been part of our toolbox. We can use it also in other areas where we see deficiencies, such as in risk data aggregation, and we’ll use this more frequently in the future.

So what exactly will you use it for?

One long-standing deficiency at many banks is risk data aggregation. This is about the quality of information and data systems used by banks’ management and boards to assess risks. These systems must provide a solid basis for decisions. However we found serious weaknesses when we conducted a thematic review back in 2016. Since then, we have urged banks to make progress, but not all are remediating deficiencies as we think they should. We have therefore decided to use the periodic penalty payments tool in this area too.

Have you already informed some banks that they are now under closer scrutiny?

We have communicated that we intend to use the escalation ladder for other risk areas as well, not only for climate. Banks have long been aware that they have deficiencies in risk data aggregation. We are currently moving up the other steps of our escalation ladder for this risk area.

So, no bank is currently aware that it is subject to periodic penalties in the future?

It takes time to reach the stage of periodic penalty payments because there is a full process to go through. We are more advanced in the area of climate-related risks, while the work on other risk areas has just started.

Aside from periodic penalties, the sanctions we see are often of modest amounts compared with other jurisdictions or regions. Should we expect this to change with the changes to your Supervisory Review and Evaluation Process, or do European banks simply behave better than their counterparts worldwide?

Sanctions are different from periodic penalty payments. They are applied in cases of past misconduct, and they deter future non-compliance. It’s difficult to compare them with those of other jurisdictions because many other authorities have different duties and mandates and operate with different legal frameworks.

You have mentioned geopolitical risk several times, and it was one of your priorities when you began your tenure. Are you satisfied with how banks have addressed this issue?

It's challenging to provide a comprehensive assessment since exposure to geopolitical risks varies significantly across banks. I’m pleased that we now have a framework for evaluating these risks. Essentially, geopolitical risk impacts traditional risk categories through three channels: financial markets, the real economy, and through the security and safety channel.

The financial market channel considers sudden repricing of risk due to geopolitical events which have not been priced in by markets before. This can have widespread implications. The real economy channel examines for example disruptions in global value chains due to conflicts, affecting corporates and thus credit risks. Last, the security and safety channel includes financial sanctions, reputational risks or physical disruptions like cyberattacks.

Most of these risks are covered by our regular supervisory activities. We have, for example, integrated geopolitical risk considerations into stress tests and provided clear guidance for banks how to address geopolitical risks in their three-year capital planning.

While there are always areas for improvement, we are actively monitoring and addressing these risks through our supervisory activities. Recently, we issued a guide on governance and risk management, which will be finalised next year. Geopolitical risk management is a core function, requiring top-level commitment from supervisory boards. It can’t be delegated solely to risk managers due to its inherent uncertainty. Scenario analysis and a strong governance framework are crucial to address uncertainty.

You mentioned geopolitical risk, along with climate risk. It seems these issues are top priorities for you. However, there’s a broader rethinking in other sectors, such as the automotive industry, suggesting we might be moving too fast. Is European banking supervision reconsidering its pace, or will you continue with the current approach?

Our supervisory approach does not change with political sentiments. Quite to the contrary, if efforts to address climate change weaken, then transition risks increase. This is because governments may have to implement even stronger measures in the future, such as higher carbon pricing, to make up for the lack of action in the past. If inadequate political action is taken now, carbon prices would have to rise significantly later, amplifying transition risks. If climate policies are not implemented effectively, physical risks will also escalate.

We must look beyond political cycles and ensure banks are well-prepared for these changes. Better preparation and consideration of transition risks may actually alleviate political concerns about the financial stability implications of climate policies. For example, analyses have shown that the revaluations of assets due to higher CO2 prices and thus the risk of “stranded assets” would be manageable for the financial sector. Our ongoing efforts will ensure that the management of climate and environmental risks improves further.

That's very interesting. It seems you have to do more if less is done to address climate change.

Exactly.