According to the World Bank Report, Large banks are more vulnerable to possible losses since their loan exposures are less collateralized. The average loss given default (LGD) on credit exposures would vary from 30% for smaller banks to over 50% for bigger banks. Report suggest that more aggressive emission reduction objectives supported by timely and intense investment result in decreased credit risk for banks in the medium run

European Central Bank (ECB) has revealed the findings of its second economy-wide climate stress test in September. The findings indicate that the best strategy to reach a net-zero economy for enterprises, people, and banks in the eurozone is to accelerate the green transition at a quicker rate than existing rules allow.

The findings suggest that a speedier transition benefits both enterprises and families. While a faster shift requires more investment and higher energy prices at first, financial risks drop dramatically in the longer term.

Profits and buying power are less affected since the upfront investment in renewable energy pays off sooner and eventually cuts energy costs. Green investment by eurozone enterprises climbs to €2 trillion by 2025 in the expedited transition scenario, whereas it is just €0.5 trillion in other scenarios.

Green investment catches up with the fast transition by 2030, reaching a total of €3 trillion, however it stays lower in the delayed transition. Green investment must be raised rapidly in order to catch up.  Enterprises are at greater risk, particularly in energy-intensive industries such as manufacturing, mining, and power, with debt levels rising and profitability dropping almost twice as much as the typical eurozone firm.

If businesses are in risk, so are the banks that lend to them. Banks are more vulnerable to credit risk if the transition is pushed at a later stage and higher-cost investment is required fast. Banks should expect their credit risk to increase by more than 100% by 2030 compared to 2022 in the late-push transition, but only 60% in the accelerated transition.

According to the World Bank Report, Large banks are more vulnerable to possible losses since their loan exposures are less collateralized. The average loss given default (LGD) on credit exposures would vary from 30% for smaller banks to over 50% for bigger banks. Report suggest that more aggressive emission reduction objectives supported by timely and intense investment result in decreased credit risk for banks in the medium run.

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