Europe\u2019s bank watchdog will look at how exposed lenders are to heat-related risks, as temperature records keep getting broken.<\/p>\n
The European Banking Authority is currently developing ways to measure the financial impact of extreme heat, a spokesperson for the Paris-based authority said. The process may result in the inclusion of heat as a separate category in routine stress tests that gauge banks\u2019 ability to withstand losses, the person said.<\/p>\n
The measure is the latest step by regulators in Europe, the world\u2019s fastest warming continent, to address perceived risks to the banking sector from global warming. According to the European Environment Agency, extreme climate and weather shocks caused more than \u20ac200 billion ($230 billion) in damage between 2021 and 2024. The EBA will try to assess how exposed banks\u2019 loan books are to such losses.<\/p>\n
Heat-related damage tends to be less straightforward to measure than losses caused by floods and wildfires, the EBA said. For now, the next stress test measuring European bank resilience will focus on flood risk. The process, which extends into 2027, will be handled by the EBA, the European Central Bank and national supervisors, and will look at risks over a three-year period.<\/p>\n
Unlike previous stress tests, banks will for the first time face scenarios designed to measure their vulnerability to risks associated with transitioning to a lower-carbon economy as well as to the physical risks that stem from climate change.<\/p>\n
Flood risk can now be measured by linking so-called hazard maps to the location of physical assets, which allows \u201cbanks to estimate exposures and potential damages in a relatively consistent manner across institutions,\u201d the watchdog said.<\/p>\n
The annual costs related to floods \u2014 the most common category of natural disaster \u2014 exceeded \u20ac31 billion in 2024 for the EU, compared with an average of \u20ac8.6 billion between 1980 and 2024. The European Environment Agency estimates that the cost of coastal floods alone could climb to \u20ac1 trillion a year by the end of the century.<\/p>\n
Heat, though not yet its own category in the coming stress tests, \u201cis increasingly recognized as a material climate risk,\u201d the EBA said.<\/p>\n
The impact of heat waves is visible through data like \u201clabor productivity, sectoral performance, energy demand, agricultural output and broader economic activity,\u201d the watchdog said. That means using macroeconomic variables such as gross domestic product, which would currently \u201crequire a different modeling framework,\u201d it said.<\/p>\n
Incorporating heat in the stress tests would also \u201chave added further complexity\u201d and \u201cplaced additional burden on banks and supervisors alike,\u201d the EBA said.<\/p>\n
The recent extreme heat, which left streets across Europe as empty as during the Covid pandemic, should serve as a warning sign of the potential economic losses ahead, Carsten Brzeski, global head of macro at ING Bank NV, said in a recent note to clients.<\/p>\n
Northern Europeans often dismiss the problem as something that mostly affects the region\u2019s south; but the north is often vulnerable because its infrastructure isn\u2019t built to cope with such conditions, Brzeski said.<\/p>\n
The number of hot day and nights is expected to \u201csignificantly\u201d increase, according to a June report<\/a> by the European Environment Agency. And with almost half of all schools and hospitals often located in areas devoid of trees and greenery, the risks to human life are rising, it added.<\/p>\n Banks are starting to react. Heat is a \u201cgrowing and often \u2018silent\u2019 risk,\u201d said Elvira Calvo, head of sustainability business transformation at BBVA SA, in an interview.<\/p>\n Spain\u2019s second largest bank has started adjusting prices on corporate loans, based on how exposed clients are to the physical effects of global warming. The program will be expanded to eventually include retail customers, Calvo said.<\/p>\n Banks are getting better at differentiating between companies, and big greenhouse-gas emitters without transition plans face less favorable lending conditions, Frank Elderson, a member of the ECB\u2019s executive board, said in a July 2 speech.<\/p>\n But Elderson also saidd that banks need to do more. They now face a July 10 deadline<\/a> to respond to the EBA\u2019s proposed stress test methodology. And on July 8, EU lawmakers are due to discuss<\/a> how to protect people against heat waves and wildfires.<\/p>\n Climate Risk Elements of 2027 Stress Test:<\/p>\n The transition risk shocks include elements such rising carbon prices and cover three years from 2027, while the physical risk scenario is defined as river floods and applies to 2027 only<\/p>\n Banks must calculate the shocks\u2019 expected impact on probabilities of default and expected losses, compared with historical default averages and past realized losses<\/p>\n Banks should provide projected losses both gross and net of insurance coverage, and must also consider potential delays and shortfalls in insurance payments<\/p>\n Photograph: An empty restaurant terrace during high temperatures in Toulouse, on June 24, 2026; Matthieu Rondel\/Bloomberg<\/p>\n Copyright 2026 Bloomberg.<\/p>\n \n Topics
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