Steve Marlin

Tweet Facebook LinkedIn Save this article Send to Print this page The European Central Bank’s new Pillar 2 Guidance (P2G) methodology still gives supervisors too much discretion to set non-binding capital add-ons, banks argue, and could result in diverging standards across the eurozone. The ECB unveiled a two-step process for determining European Union banks’ P2G levels on July 30 – the same day the European Banking Authority (EBA) released the results of its biennial stress tests.

The US Federal Reserve became the latest regulator to announce a pilot scenario analysis for climate risk in September, following in the footsteps of supervisors in the UK, France and at the European Central Bank. Banks have grappled with how to calculate the impact of climate change on their credit risk. They are now turning their attention to operational risk, and finding the relationship with climate change even harder to gauge, partly due to a lack of regulatory guidance.

Banks should adjust their economic capital and loan loss reserves to reflect the forecasting risk in expected credit loss models, according to two credit risk modelling experts. They fear expected credit loss (ECL) model forecasts could be left exposed, at a time when banks are anticipating rising defaults and provisions in the coming months, on the back of the energy price shock and interest rate hikes.