Top EU banks exposed to $239bn in fossil fuel assets

View of the skyline and high-rise buildings in Germany's financial capital Frankfurt am Main. [Ronald Wittek/EPA-EFE]

A new report published by Finance Watch unveiled the exposure of EU banks to fossil fuel assets and called for higher capital requirements to ward off the financial stability risk of stranded fossil fuel assets.

The report, published on Tuesday (4 October), analysed the balance sheet of 60 large global banks, including 22 EU banks, based on data from 2021.

In total, the report estimates that the 60 banks hold fossil fuel assets of around $1.35 trillion. Of these, $239 billion are held by EU banks. These are credits the banks have doled out for existing fossil fuel activities.

In Europe, the six French banks covered by the study are most exposed to fossil fuel assets, sitting on $142.3 billion, which accounts for 1.31% of their total assets. The four German banks, meanwhile, are relatively less exposed with fossil fuels comprising $22.8 billion, or 0.74% of their total assets. The five Italian banks in the study have fossil fuel assets of $16.9 billion, or 0.61% of their total.

On average, the EU banks are slightly less exposed than US banks, with 1.05% of total assets exposed, compared to 1.28%.

Financial stability risk

While the percentages of fossil fuel assets might not appear overwhelming, the NGO Finance Watch argues that they pose a risk not only to the climate but to financial stability. As the economy has to transition away from fossil fuels, there is a risk that fossil fuel companies get into payment difficulties and that fossil fuel assets become stranded.

Moreover, Finance Watch secretary general Benoît Lallemand argued that fossil fuel assets increase the macro risk of climate change-induced economic disruption. “Anytime you invest in fossil fuels, you are increasing the risks,” he told EURACTIV.

According to Lallemand, current capital requirements for banks artificially subsidise the fossil fuel industry because climate risks are not properly taken into account.

Today, banks often back fossil fuel assets with only little capital, since fossil fuel companies benefit from good credit ratings that do not take into account climate risks.

“This artificially reduces the cost of capital for fossil fuel companies,” Lallemand said.

Higher capital requirements for fossil fuel exposures?

That is why Finance Watch argues that banks should back exposures to existing fossil fuel assets with more capital. The NGO argues for a risk-weight of 150%, meaning that every loan given to companies for existing fossil fuel activities would have to be backed by 12% of capital.

Currently, these capital requirements for banks are under review. Last year, the Commission proposed a change to the EU’s bank capital requirements rules last year to bring the EU’s banking regulation up to speed with the international Basel III framework.

Commission wants more capital buffers for EU banks – in about a decade

Through a newly proposed banking package the EU commission is trying to find a balance between increasing financial stability, protecting bank profits and sustainability concerns.

While the Commission’s proposal did not include any binding climate-related capital requirement measures, some members of Parliament are pushing to include these measures.

Social Democrats Paul Tang and Aurore Lalucq, for example, have tabled an amendment to Parliament’s draft report to raise the risk-weight for existing fossil fuel exposures to 150% and the risk-weight for new fossil fuel exposures to 1250%. This would mean that 100% of a loan to exploit new fossil fuel reserves would have to be backed by bank capital.

Liberal members of Parliament Pascal Canfin and Gilles Boyer and their green colleague Ville Niinistö tabled similar amendments to the draft report by Jonás Fernández.

Banks call it counterproductive

The European Banking Federation (EBF), meanwhile, resists these amendments, calling them “counterproductive”.

“They would make banking more rigid, not more robust,” an EBF spokesperson told EURACTIV, arguing that greening brown industries “will require lending from the banking sector to help them make the transition.”

“Reducing the supply of funds now could significantly increase the cost of the transition,” the EBF spokesperson added.

Lallemand, meanwhile, suspects another motivation. “Return on equity is what matters to them,” he told EURACTIV. Higher capital requirements would increase the equity and thus make banks safer but less profitable.

Moreover, he argued that banks were not necessarily worried about financial stability since they knew that the state would ultimately step in if the risks they took would bring them down.

40% of bank profits

The Finance Watch report also calculates how much capital would be needed for EU banks to fill up their buffers so that their existing fossil fuel exposures are backed with 12% of bank equity.

According to the NGO’s calculations, the 22 largest EU banks would need to cough up $34 billion in capital, which is about 40% of their 2021 profits.

“It’s very feasible, very acceptable,” Lallemand said.

Remarkably, however, US banks would only need to invest about 14% of their 2021 profits to cover their existing fossil fuel exposures even though they have relatively larger exposure, an indication of how much more profitable US banks are than EU banks.

Hedge fund billionaire calls for higher capital requirements for fossil fuel financing

Days before the Commission is expected to publish its proposal to change capital requirements rules, billionaire hedge fund manager Chris Hohn called for a stricter treatment of fossil fuel investments in banks’ balance sheets. His call is supported by activists and experts who fear the effects of climate change on financial stability

[Edited by Nathalie Weatherald]

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