Home Banking Financing the European Green Deal: Strong banks are welcome, but they need appropriate and fair regulation

Financing the European Green Deal: Strong banks are welcome, but they need appropriate and fair regulation

by internationalbanker

By Lothar Jerzembek, Head of Regulatory Affairs, International Bankers Forum





On January 10, 2022, the European Banking Authority (EBA) made positive statements about the European banking world: Banks’ capital ratios continue to be well above regulatory requirements; asset quality has further improved; and profitability has stabilised at a level above pre-pandemic levels.1

State of play

However, a closer reading of the EBA’s remarks puts this positive impression into perspective: Financial and capital markets remain vulnerable to negative news about macroeconomic outlooks, inflationary pressures and pandemic developments. Profitability is associated with high uncertainties. And according to the EBA, the majority of banks expect an increase in operational risks, mainly due to increased vulnerabilities from cyberspace and information and communication technology (ICT).

These politically balanced statements come at a time characterised by various insights for banks: Global competition and further European integration are associated with high uncertainties. Economic-stimulus packages and significant support measures have substantially aided the EU economy over the last two years. Pressures on automation, digitalisation and operational resilience are growing steadily.

From a regulatory perspective for European banks, the main focus is on the banking regulatory project published by the European Commission (EC or the Commission) on October 27, 2021, the Banking Package 2021.2 It will be adopted soon and has to be implemented from 2025 with a transition period until 2032. In addition, on November 25, 2021, the Commission “adopted a package of measures to improve the ability of companies to raise capital across the EU”.3 And on December 15, 2021, the Commission unveiled its strategy on supervisory data in EU financial services.4 The Commission’s objective is “to modernise EU supervisory reporting and put in place a system that delivers accurate, consistent, and timely data to supervisory authorities at EU and national levels”.

The course banks and savings banks have to set under these conditions is enormous. However, they are overlaid by the European Union’s (EU’s) climate-policy plans. With the European Green Deal, the EU is to be made climate-neutral by 2050. On July 6, 2021, the Commission announced a new phase of the EU Sustainable Finance Strategy.5 The strategy defines four “main areas” with six packages of measures that the economy needs for sustainable development:

By 2030, the EC wants to reduce CO2 (carbon dioxide) emissions by at least 55 percent compared to 1990.6 This extraordinarily ambitious, challenging and complex transformation of the economy requires huge investments.

Political institutions rightly expect credit institutions to play major roles in this. All private, cooperative, savings and promotional banks are aware of this responsibility! The key question is: Are the general conditions and determining factors discussed sufficient for credit institutions to actually make their contributions in the transition to a sustainable, increasingly digitalised economy?

The following explanations and comments concentrate on the climate-related and environmental risks currently in focus, taking into account operational resilience.

A great number of challenges

ESG regulation and supervision

There is widespread consensus that environmental, social and governance (ESG) risks can assume a high magnitude and thus be potentially dangerous for the financial system. The climate crisis is exposing banks to physical and transitional risks. Banks will need to strengthen their risk-management frameworks and reassess their business strategies.7

European Commission’s activities

The EU taxonomy from June 2020 will provide a classification framework for sustainable economic activities for all companies in the financial system. It sets out four criteria for environmentally sustainable economic activities and lists six environmental objectives. These criteria are substantiated by further delegated acts and references to other EU regulations and directives. New reporting obligations on sustainability will arise for companies—already in place in part from January 1, 2022. The current consultation on the inclusion of gas and nuclear activities illustrates the enormous political-steering function of the EU taxonomy.

On April 21, 2021, the European Commission adopted a package of measures, including a delegated regulation on EU climate taxonomy, a proposal for the Corporate Sustainability Reporting Directive (CSRD) and six delegated acts.8 On December 9, 2021, the Commission Delegated Regulation (EU) 2021/2139 was published in the Official Journal of the European Union. The revised CSRD will profoundly expand the scope and nature of sustainability reporting, especially by all companies listed on an EU-regulated market, including banks.

The most widely known sets of rules for banks—the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD)—will be expanded by the Banking Package 2021 to include ESG risks in the course of the Basel IV implementation. These proposals will strengthen banks’ resilience and contribute to the transition to climate neutrality. Even more, they provide stronger tools for supervisors overseeing EU banks.

The European Commission has introduced harmonised definitions for the terms environmental risks, social risksand governance risks. The proposals include considerable new ESG requirements for banks, such as requiring them to systematically identify, disclose and manage ESG risks as part of their risk management. This includes regular climate stress testing by both supervisors and banks. In addition, the suitability of the macroprudential framework for dealing with these risks will be reviewed.

A first application date of January 1, 2025, with transitional arrangements applying over a further five-year period, seems appropriate at first glance. However, of great importance is that the EBA’s deadline to report on the potential prudential treatment of ESG exposures will be accelerated from 2025 to 2023.

European Central Bank Banking Supervision’s actions

For the year 2022, supervisors have planned a number of specific supervisory measures, including a thematic review of banks’ environmental risk-management practices and a stress test on climate-related risks.9

On October 18, 2021, the European Central Bank (ECB) published further details on how exactly the first explicit climate stress test for the institutions supervised by the ECB will proceed. It will start in March 2022.10

The ECB’s 2022 climate stress test aims to identify vulnerabilities; there is no focus on solvency. The test comprises qualitative questionnaires and quantitative stress-test projections. For transition risks, it focuses on the potential impacts under short-term and long-term scenarios. The short-term stress test is based on a three-year baseline scenario. The long-term stress test has a 30-year horizon ending in 2050; it applies—for the first time—a dynamic “balance sheet “assumption.11

The European Central Bank Banking Supervision does not foresee a direct impact on capital requirements. However, the results are likely to impact the SREP (Supervisory Review and Evaluation Process) assessments of Pillar 2 requirements indirectly.12 Additionally in 2022, the European Central Bank Banking Supervision plans related on-site inspections and follow-ups to be conducted by the Joint Supervisory Teams.13

In brief: banks’ positions

There is consensus that the EU taxonomy should not be limited to projects that are already clearly green. The taxonomy should also recognise transitional activities. The technical-assessment criteria should be clear, lean, simple and applicable in practice. The European Commission should avoid data graveyards.

The ECB’s climate stress test planned for 2022 is regarded as the most comprehensive analysis of how climate change will affect banks’ balance sheets in the coming decades at a European level. It will present the banks with enormous challenges in supplying the required data and deriving their risk projections from the scenarios.

Regarding the Banking Package 2021, banks expect that the principles of materiality and proportionality should not only apply to disclosure requirements, and banks should not be subject to greater regulation compared to nonbank financial institutions (NBFI). They expect long discussions in the European Parliament and EU Council that could quickly shorten the period up to the application date. The option of a sliding implementation period of two years after completion of the banking package may be considered.

Operational resilience

Long before the coronavirus pandemic, big firms such as Google, Amazon, Facebook and Apple were able to start offering financial services. Other entrants in financial services use data about customer behaviours and their own algorithms to perform assessments—until recently, the domain of banks.

In addition, the coronavirus pandemic had a significant impact on digital transformation. Customer demands have changed; there is great pressure to reduce costs and increase efficiency. So banks are left with no option but to use modern technology. They need sustainable business models to be ready for these challenges.14

But there are new risks that have come up with technology developments. Involving third parties through outsourcing and cloud computing will also make banks more dependent on the availability of IT (information technology) services. It can be hard to monitor external systems, and the services used may become concentrated among just a few providers.

Banks will become more vulnerable to cyber-risks. European Central Bank Banking Supervision identified deficiencies in IT outsourcing and cyber-resilience. Banks’ attention must be focused not only on defending against cyber-risks but also on strengthening their resilience.15 Therefore, a rising topic for banks is how to manage security risks, information and communication technology, and data quality.

Increasing digitalisation in the financial sector and growing interconnectedness across financial institutions and third parties are also important topics for regulators and supervisors. They will intensify their respective supervisory activities, among other things, through “data collection on banks’ outsourcing registers as well as targeted reviews and on-site inspections on cyber resilience and IT outsourcing agreements”.13

The European Commission’s new strategy on supervisory reporting shall “contribute directly to the objectives of the digital finance strategy and the digital finance package”.4 Moreover, this new strategy will contribute to the objectives of the Capital Markets Union (CMU) and help achieve a single market in financial services.

New market entrants, customer needs, capital markets and ongoing regulatory and supervisory requirements force banks to continue investing in further digital progress. Digital transformation should be a must for banks!


It is obvious that banks need sustainable business models to be ready for these challenges. 2022 and subsequent years offer each bank the opportunity to better position or even reposition itself in the market. The expected structural changes, with far-reaching digitalisation and a profound green transition, in the European Union will require immense financial resources. Admittedly, the risks from the green transformation, in particular, will be higher, as such investments require a much longer time horizon. Various bankers consider that managing ESG risks will probably be the biggest upheaval in banks since the introduction of rating procedures in corporate finance.

At the same time, however, the chances of classic lending and support of bond issues or initial public offerings (IPOs) are even greater. This opens up the scope for return on investment and profitability. Similarly, regulators and supervisors should recognise that diverse and multi-layered supervised banks must take on more risks to fulfil their economic missions. Therefore, credit institutions need better framework conditions.

This also means that nonbank financial institutions (NBFIs), as important competitors but still relatively unregulated in comparison, must be looked at more intensively. Comprehensible, consistent, concrete and transparent guidelines, principles and frameworks—a level playing field—must apply to all!

May the political and regulatory decision-makers keep the European financial system stable and make it more efficient for the challenges ahead.



1 European Banking Authority: “Asset quality has further improved, but cyber risk remains a source of concern for EU banks,” Paris, January 10, 2022.
2 European Commission: “Press release on Banking Package 2021: new EU rules to strengthen banks’ resilience and better prepare for the future,” Brussels, October 27, 2021.
3 European Commission: “Press Release on Capital Markets Union: Commission proposes new measures to boost Europe’s capital markets,” Brussels, November 25, 2021.
4 European Commission: “Press Release on Digital Finance: new Commission strategy paves the way for modern and streamlined supervisory data reporting,” Brussels, December 15, 2021.
5 European Commission: “Communication on a Strategy for Financing the Transition to a Sustainable Economy, COM(2021) 390 final,” Strasbourg, July 6, 2021.
6 European Commission: “Communication on ‘Fit for 55’: delivering the EU’s 2030 Climate Target on the way to climate neutrality, COM(2021) 550 final,” Brussels, July 14, 2021.
7 European Central Bank Banking Supervision: “Exchange of views with the European Affairs Committee and the Finance Committee of the French Senate,” Andrea Enria, Paris, January 12, 2022.
8 European Commission: “Communication on EU Taxonomy, Corporate Sustainability Reporting, Sustainability Preferences and Fiduciary Duties: Directing finance towards the European Green Deal, COM(2021) 188 final,” Brussels, April 21, 2021.
9 European Central Bank Banking Supervision: “The state of climate and environmental risk management in the banking sector. Report on the supervisory review of banks’ approaches to manage climate and environmental risks,” November 22, 2021.
10 European Central Bank Banking Supervision: “Information on participation in the 2022 ECB Climate Risk Stress Test,” Frankfurt am Main, October 18, 2021.
11 European Central Bank Banking Supervision: “The evolution of stress testing in banking supervision,” Elizabeth McCaul, Frankfurt am Main, December 10, 2021.
12 European Central Bank Banking Supervision: “Mapping connected dots: how climate-related and environmental risk management is becoming a reality,” Frank Elderson, Frankfurt am Main, December 10, 2021.
13 European Central Bank Banking Supervision: “SSM Supervisory Priorities for 2022-2024,” December 7, 2021.
14 European Central Bank Banking Supervision: “The digital transformation of the European banking sector,” Pentti Hakkarainen, Luxembourg, January 13, 2022.
15 Börsen-Zeitung: “Weckruf für alle Aufseher,“ Joachim Würmeling, December 28, 2021, Number 250, Page 3.



Lothar Jerzembek is Head of Regulatory Affairs at International Bankers Forum (IBF) and Owner of JSC Jerzembek Senior Consulting. Prior to his current role, Lothar was a member of the management board at the Association of German Public Banks (VÖB) in Berlin and he also worked for Dresdner Bank AG for more than 12 years.


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