EU climate stress test shows transition risks unlikely to endanger financial stability

The European Central Bank and European Supervisory Authorities released a climate stress test report, indicating that transition risks alone are unlikely to threaten EU financial stability. However, combining these risks with macroeconomic shocks could increase losses for financial institutions. The stress test analyzed three scenarios related to the EU's Fit-for-55 climate package, which aims for a 55% emissions reduction by 2030. Results showed first-round losses for banks and insurers ranging from 5.2% to 21.5%, depending on the scenario. Despite potential losses, the impact on financial institutions' capital is expected to be mitigated by various factors, including income and cash reserves. The findings aim to guide policymakers in managing climate risks and ensuring financial resources for the green transition.