Penalties (still) in the pipeline?
The ECB has still not decided if banks must pay fines for their climate risk management
Quite quiet
ECB banking supervision has been rather quiet so far this year. Since it announced the 2024 SREP results and set out its supervisory priorities in December, there have been virtually no public statements from the Eurotower. About the only exception was the launch last month of the 2025 EU-wide stress test, which I wrote about here.
Elderson speaks
Frank Elderson broke the silence this week with brief remarks on climate and environmental risk. Speaking at a webcast on climate change, Elderson described the ECB's activities in this field, both as a monetary policy authority and as a banking supervisor.
Those who have been following Elderson’s (several) previous statements on this topic will have found little new in terms of policy. The ECB is a “climate and nature policy taker”, not a policy maker. But it must understand and respond to the impact of climate change on its two main mandates. So the ECB has analysed how climate change bears on the macroeconomy, inflation and the appropriate monetary policy. It tilted its asset purchases toward greener issuers (until QE was stopped). And it is considering how to incorporate climate considerations into its collateral eligibility policies.
Meanwhile as a supervisor the ECB is requiring banks to take account of climate and environmental risks, as set out in its 2020 Guide. Banks, Elderson said “must ensure that practices are in place for the sound management of climate and nature-related risks.”
The ECB set interim (March 2023) and final (end 2024) deadlines for banks to comply. And it will impose financial sanctions (in the form of periodic penalty payments or PPPs) on those that fail to meet its expectations.
Still waiting
On the state of those PPPs, Elderson also told a familiar story. Back in late 2023, 22 were told they faced penalties if they did not remedy shortcomings in their climate and environmental risk materiality assessments by a certain date. Most have since improved. As for the others? The situation remains unclear. Elderson said only that for these few “the process to determine whether penalties have been incurred is ongoing.”
This is essentially the same message as Elderson has been giving since last summer. (Though the ECB never publicly disclosed it, the deadline for banks to comply was said to be April or May 2024.) In July he said that the process was underway and banks were being given their ‘right to be heard’.
As I wrote back then, it is understandable that the ECB should want to proceed carefully in its first use of the PPP enforcement tool - not least to guard against a potential legal challenge. But as the months go by, I am beginning to wonder if any climate fines will actually be imposed. I’ve heard that some in the ECB leadership hoped all along that the PPP deterrent would never have to be used. Perhaps that view is prevailing against the argument that threatening but not following through undermines PPPs’ credibility. Or perhaps there are other dynamics within the Supervisory Board that are preventing a decision from being made.
Whatever the reason, the waiting continues. Banks may conclude that even if they do fall short of ECB expectations, it will be a long time before they actually have to pay any penalties.