Integrating environmental risks into the Pillar 1 prudential framework
In May 2022, the European Banking Authority (EBA) published a Discussion Paper with the aim to evaluate the appropriateness of the current prudential framework to accurately assess the rising risks resulting from environmental issues. A key question the Discussion Paper seeks to address is - do the mechanisms of the current Pillar 1 framework allow to capture new risks such as environmental risk or should these risks be subject to a dedicated treatment?
In this article, we look at the key concepts of environmental risk and examines the EBA’s analysis of the interaction between environmental risks and the traditional prudential risk categories – credit, market, operational and concentration.
We further outline the key actions firms need to take to prepare themselves for potentially binding Pillar 1 treatment, while awaiting further regulatory guidance.