Elderson urges banks to prepare for risks models cannot capture

Elderson, ECB Executive Board member and Supervisory Board Vice-Chair, said climate stress tests and scenario exercises cover all risk drivers banks themselves deem material in only around 15 percent of cases.

Banks often use these exercises to calibrate buffers in their internal capital adequacy assessment process while integration into core models remains incomplete.

Since 2022, significant supervised banks have consistently earned, on average, more than 70 percent of interest income from carbon-intensive sectors.

Elderson urged banks to challenge scenarios, tailor them locally and supplement them with expert judgement.

He called for sufficient capital, liquidity, operational capacity and strategic flexibility to absorb shocks that cannot be predicted.

Elderson distinguished measurable risks, known uncertainties and outcomes not yet identified.

Seven of nine planetary boundaries have been breached; the Arctic is warming almost four times and Europe roughly twice the global average.

Natural emissions from thawing permafrost or wildfires could add up to 0.6°C in an adverse scenario, he noted.

He cautioned against relying narrowly on Network for Greening the Financial System (NGFS) scenarios and extended the resilience approach to demographic, geopolitical, artificial intelligence and quantum-computing risks.