12 October 2023
The European Banking Authority (EBA) today published a Report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms. Taking a risk-based approach, the Report assesses how the current prudential framework captures environmental and social risks. It recommends targeted enhancements to accelerate the integration of environmental and social risks across the Pillar 1. The proposed enhancements aim to support the transition towards a more sustainable economy, while ensuring that the banking sector remains resilient.
Environmental and social risks are changing the risk profile for the banking sector and are expected to become more prominent over time. They affect traditional categories of financial risks, such as credit, market and operational risks. Hence, environmental and social factors may affect both the risks faced by individual institutions and the financial stability of the entire financial system.
The Report recommends risk-based enhancements to the risk categories of the Pillar 1 framework. It also develops considerations on the potential use of macroprudential tools. The Report explains why the EBA does not support the introduction of a green supporting factor or a brown penalising factors at this stage. The use of such adjustment factors presents challenges in terms of design, calibration, and complex interaction with the existing Pillar 1 framework.
Against this background, the EBA puts forward recommendations for short-term actions to be taken over the next three years as part of the implementation of the revised Capital Requirements Regulation and Capital Requirements Directive (CRR3/CRD6).
In particular, the EBA is proposing to:
Taking a medium-to-longer term perspective, the Report also presents possible revisions of the Pillar 1 framework reflecting the growing importance of environmental and social risks. These include:
Alongside other policy initiatives outside the prudential framework, the EBA will continue to strengthen the integration of environmental and social risks across all pillars of the regulatory framework.
The EBA is mandated under Article 501c of Regulation (EU) No 575/2013, i.e. the Capital Requirements Regulation (CRR), and Article 34 of Regulation (EU) 2019/2033, i.e. the Investment Firms Regulation (IFR), to assess whether a dedicated prudential treatment of exposures related to assets, including securitisations, or activities (CRR), and of assets exposed to activities (IFR) associated substantially with environmental and/or social objectives would be justified.
The Report builds on the principles presented in the EBA Discussion Paper on the role of environmental risks in the prudential framework, published in May 2022.