Andrea Enria, Chair of the European Central Bank's Supervisory Board, recently announced that banks would face capital add-ons if they could not deal with climate risk. He told banks to act quickly before a regulatory framework coerces them into doing.

Enria used a speech in Frankfurt to express ECB's concerns over the gap between the supervisory expectations and institutions' practices. He emphasised the remarks made by François Villeroy de Galhau, a governing council member, that banks are going to face capital add-ons if they fail to go in line with climate transition plans or if the oncoming climate test states the shortcomings in their management and governance arrangements.

Enria voiced his dissatisfaction with what he perceives as a preoccupation with capital requirements as the solution to climate risk rather than the ECB's present full range of supervisory measures. He believes it gives the idea that if banks are confronted with capital add-ons, they will move to capture relevant risks. Instead, he said that taking swift action in this area is plainly in the banks' best interests and much more so in the best interests of the communities they serve.

Some climate experts have raised doubts regarding whether banks can move swiftly without any actions from the regulators. According to Finance Watch, a non-governmental organisation conducting research and advocacy on financial regulation, markets are weak when it comes to self-correcting, and hardly any incentives for banks to change their behaviour.

The European Central Bank expects to start discussions on climate-adjusted capital rules after its ongoing climate stress test concludes. Some officials cautioned that the process of determining the methodology is going to be disputed, as there are no relevant data on the banks' balance sheet on climate impacts.

The European Union is ready to revise its capital requirements regulation and directive. Consequently, the transition will facilitate the incorporation of climate risks into the legal framework of banking supervision and allow banks to develop transition plans.