Its first ecological stress tests show that large banks could withstand a chaotic energy transition without suffering in their capital ratios
The Bank of England is relatively relaxed on climate change. It is one of the lessons from its first ecological stress tests, which show that major banks could absorb the costs of a chaotic energy transition without suffering in their capital ratios.
The scariest of scenarios, from the perspective of HSBC or Barclays, would be a decade of total inaction, followed by a frantic post-2030 fight to cut emissions. The rise in the price of carbon would raise unemployment in the United Kingdom to 8.5%, compared to the current 4%, and would reduce housing and stock prices by a fifth, which would cause a recession and defaults by companies that They use carbon. The accumulated losses of the big banks would amount to 130,000 million euros, according to the supervisor. It seems like a lot, but it isn’t. The seven banks involved had $3bn in loans in December, we reckon. The losses estimated by the Bank of England are equivalent to about 4.3 billion a year: 12% of their combined 2021 profits. In other words, climate change will only dent income, leaving its mattresses intact.
It is true that the models are very uncertain and do not take into account possible losses in commercial activities. But this is more likely to be an overestimate than the reverse. The supervisor assumed balance sheets would remain flat from 2020. In reality, they are likely to reduce climate-sensitive exposures as the planet warms and some assets begin to literally end up underwater.
These data serve as cover for CEOs who want to continue financing fossil fuels. The central bank’s chief watchdog, Sam Woods, said yesterday that cutting funding to high-emitting companies could prevent them from investing in cleaner technologies. Shell and BP finance chiefs can breathe a sigh of relief.
But for politicians, the report is grim. In Britain at least, regulators seem reluctant to lend a hand in the energy transition.
