Montagner highlights physical climate risks and insurance limits for banks
Patrick Montagner, Member of the Supervisory Board of the ECB, emphasized the growing financial impact of physical climate risks on banks. He highlighted the role of insurance in mitigation but also its structural limitations.
Uncovering banks' climate risk blind spots
The financial impact of climate-related risks on the banking sector continues to grow, despite some waning political attention.
The ECB set clear supervisory expectations in 2020 for managing physical climate risks, requiring institutions to integrate these into governance, strategy, and risk management processes.
However, supervisory work reveals significant gaps.
A 2022 thematic review found banks' physical risk management less advanced than transition risk approaches, with shortcomings in granular exposure identification and integration into credit decisions.
The ECB's 2022 climate risk stress test confirmed the relevance of physical risks, showing non-negligible losses in certain portfolios.
These findings align with broader economy-wide stress tests, indicating that delayed action on physical risks will be costlier than an orderly transition.
Pillar 3 disclosures since 2023 have increased transparency, yet banks' capabilities to estimate related losses remain limited.
Around 90 percent of banks consider themselves materially exposed to physical risks.
Insurance: A partial shield, not a full solution
Insurance is a key tool for mitigating physical risks, especially for real estate collateral.
However, supervisory findings show it is insufficient.
EIOPA reports only a quarter of EU climate-related losses are insured, with significant variations.
This limited coverage complicates collateral protection assumptions.
Structural challenges include annual insurance renewals versus multi-year loans, hindering banks' long-term visibility.
Reliance on government support post-disaster may also become less viable.
In response, banks are enhancing physical risk management.
They are developing centralized systems integrating geolocation data, risk assessments, and collateral information.
Risk assessment frameworks now incorporate location-specific physical risk indicators and mitigation measures.
Experts caution that current models may underestimate risks, as climate impacts are materializing faster than anticipated.