The Vice-President of the ECB Supervisory Board, Frank Elderson, points out that the fiscal buffer for states to act as a last resort insurer has decreased. Only 15% of capital files assess all material risks.
The European Central Bank (ECB) has informed financial institutions that the fiscal room for governments to act as last resort insurers has diminished and is more limited, as warned by the Vice-President of the ECB Supervisory Board, the Dutch Frank Elderson, at a conference with the Bank of England, as reported by elconfidencial.com.
Elderson explained that banks must "have a well-developed and risk-sensitive reaction function," a preparation that includes mitigation measures such as insurance protection and the reduced fiscal buffer of states.
"Many banks are still in a relatively early phase of integrating climate and natural risks into their risk models"
The supervisor emphasized that institutions must maintain adequate levels of capital, liquidity, operational capacity, and strategic flexibility to absorb unpredictable impacts. Furthermore, he stressed the need to periodically review that reaction function through scenarios and stress tests on the robustness of business models.
In the internal assessment of capital adequacy, only 15% of files include all risk factors that the banks themselves consider material, Elderson detailed, noting that many cases do not have sufficient capital coverage.
The ECB official also pointed out that there is "increasing evidence that the climate and nature crises are developing more rapidly and severely than expected." The rise in uncertainty increases the likelihood of extreme events and requires interdisciplinary cooperation, he added.
Elderson mentioned other risk areas for banking supervision, including artificial intelligence and quantum computing. Spanish institutions will need to incorporate these requirements in their upcoming capital reviews and internal stress tests.
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