The European Banking Authority publishes a discussion paper on the role of environmental risks in the prudential framework | Shearman & Sterling LLP

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The European Banking Authority has published a work document whether, and how, environmental risks should be integrated into EU prudential frameworks for EU credit institutions and investment firms. The feedback received will help the EBA to determine (in line with its mandates under the EU Capital Requirements Regulation and the EU Investment Firm Regulation) whether the EU should introduce a treatment specific prudential framework for certain exposures and assets that are substantially linked to environmental and/or social factors. objectives and impacts. Responses must be submitted by August 2, 2022.

Environmental risks are a real and growing problem for the global financial sector. The current EU prudential framework mainly consists of the EU Capital Requirements Regulation and Directive, which govern credit institutions, and the EU Capital Requirements Regulation and Directive. investment, which govern investment firms. Prudential regimes impose rules on these companies to manage risks to the financial stability of the EU. The discussion paper examines different aspects of the prudential framework (namely the provisions covering credit risk, market risk, operational risk and concentration risk), as well as the EU’s RFI, and how each interacts with environmental risks. It solicits feedback from respondents on a variety of issues, including measures that respondents may have already adopted to address environmental risks and any potential changes that should be made to existing or future prudential frameworks.

The EBA’s provisional conclusion is that the existing banking prudential framework is capable, to a certain extent, of taking environmental risk into account and could be improved by targeted adjustments. Forward-looking methodologies can also be incorporated into the framework to improve its ability to address environmental risks, which are also forward-looking.

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