Discussion paper on the role of environmental risk in the prudential framework (
EBA/DP/2022/02
)

Start Date: 02/05/2022 | Deadline: 02/08/2022 | Status: OPEN | | Send your comments

•The Discussion Paper explores whether and how environmental risks are to be incorporatedin the Pillar 1 prudential framework for credit institutions and investment firms;
•The paper touches on key elements such as time horizon, inclusion of forward-lookingelements in the prudential framework, and the overall calibration of own fundsrequirements;
•The EBA is seeking broad feedback from stakeholders, so as to deliver its final report on thistopic in 2023.

The European Banking Authority (EBA) today published a Discussion Paper on the role of environmental risks in the prudential framework for credit institutions and investment firms. The Paper explores whether and how environmental risks are to be incorporated into the Pillar 1 prudential framework. It launches the discussion on the potential incorporation of a forward-looking perspective in the prudential framework. It also stresses the importance of collecting relevant and reliable information on environmental risks and their impact on institutions’ financial losses. The consultation runs until 2 August 2022.

Environmental risks are changing the risk picture for the financial sector and will become even more prominent going forward. This affects all traditional risk categories, such as credit, market and operational risks. It also raises the question as to whether the current prudential framework can account for these new risk drivers.

The Discussion Paper provides an analysis of the extent to which environmental risks are already reflected in the Pillar 1 own funds requirements via internal and external ratings, valuation of financial instruments and collateral, or scenario analysis.

The Paper takes a risk-based approach to ensure that the prudential framework reflects underlying risks and supports resilience of financial institutions. The purpose of the prudential framework is not to achieve specific environmental objectives. These could be supported by the risk-based framework, particularly if coupled with other policy actions.

While the Discussion Paper focuses on Pillar 1 own funds requirements, it highlights the need for a holistic regulatory approach and should be seen as part of the EBA’s broader work in the area of ESG risks, which includes transparency, risk management, Pillar 2 supervision and macroprudential capital buffers. The Paper also highlights interlinkages with the accounting framework.

Consultation process

Comments to this Discussion Paper can be sent to the EBA by clicking on the “send your comments” button on the discussion page. Please note that the deadline for the submission of comments is 2 August 2022. All contributions received will be published following the end of the consultation, unless requested otherwise.

A public hearing will take place virtually in the form of a webinar on Friday 17 June from 10.00 to 12.00 CEST. The EBA invites stakeholders to register using this link by Wednesday 15 June 16:00 CEST.