The European Banking Authority (EBA) has released a report that evaluates the role of environmental and social risks in its supervision framework for banks and investment firms. The report highlights the increasing prominence of these risks, which could impact the banking sector’s risk profile and overall financial stability. The EBA recommends several short-term actions, such as incorporating environmental risks into stress testing programs and credit assessments, as well as developing metrics for concentration risk. In the long term, the report suggests revising the Pillar 1 framework to better address environmental and social risks. However, the EBA does not currently support the introduction of a “green supporting factor” or a “brown penalizing factor” to adjust capital requirements based on environmental impact.
EBA report: https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/2023/1062711/Report%20on%20the%20role%20of%20environmental%20and%20social%20risks%20in%20the%20prudential%20framework.pdf