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European Banks Wrestle with Surge in ESG Regulation Compared to Wall Street Rivals


Robert Tavares

April 7, 2024 - 08:19 am


European Banks Face Unprecedented ESG Pressures Amidst Competition With Wall Street

European Banking Concerns

The European Banking Federation has raised an alarm over the increasing environmental, social, and governance (ESG) regulations that European lenders are expected to adhere to. They assert that these stringent rules could put the European banking sector at a competitive disadvantage against their US counterparts who are not bound by similar standards.

ESG: A New Frontier In Banking Standards

The European Central Bank (ECB) is exerting pressure on banks within the region to account for ESG risks within their financial frameworks, including the provision for loan-losses. This push for comprehensive ESG reporting is emerging as a novel and critical element of regulatory standards across Europe.

As part of this scrutiny, the ECB is actively investigating how banks are prepared to address losses linked to new and "emerging risks." These risks encompass not only their clients' carbon emissions but also the increasing costs tied to the consumption of natural resources. This comes in the wake of a 2023 review that painted a grim picture of the preparedness of a vast majority of banks in Europe for dealing with such issues.

European regulators, charting a path distinct from their US peers, have introduced ESG-adjusted capital requirements, more robust disclosure mandates, and the potential imposition of an explicit climate buffer. Proponents of these regulations believe they are essential steps in equipping the sector to effectively manage imminent risks. Conversely, in the United States, the trajectory has shifted, with proposed rules being diluted amidst substantial Republican resistance.

The European Banking Federation's Stance on ESG Buffers

Denisa Avermaete, a notable policy advisor on sustainable finance at the European Banking Federation, has voiced concerns over ESG-related financial buffers, branding them as problematic “exclusively European tools.” The Federation, which represents European banking associations, foresees dilemmas surrounding the requirement for banks to allocate financial reserves to cater for risks that are yet to be quantified. Avermaete highlighted the potential issue of "double counting" that may arise by advancing such requirements prior to a comprehensive review of the climate risk within the prudential framework.

Valuation Disparities Between EU and US Banks

When it comes to market valuation, European banks trail behind their US peers. JPMorgan Chase & Co., standing as the largest bank on Wall Street, commands a market value approximately 1.9 times greater than its recorded assets. Similarly, investors estimate Morgan Stanley to be worth around 1.7 times its book value. This contrasts sharply with European banking giants like BNP Paribas SA and Deutsche Bank AG, whose price-to-book valuations linger at 0.7 and 0.5, respectively, indicating that investors undervalue them compared to the worth of their assets.

Although European bank shares have experienced growth in the past half-year, their evaluations still fall short relative to those of US banks. Philip Richards, a prominent bank analyst from Bloomberg Intelligence in London, casts doubt on the possibility of European banks catching up without witnessing a consistent rise in profitability within Europe.

Regulatory Risks as a Pivot for Bank Performance

The extent to which European banks can improve their profitability and market perception hinges on regulatory risks, according to Philip Richards. The European Central Bank maintains its focus on ensuring banks can withstand new risks that are cropping up with increasing regularity.

At a conference in February, ECB’s chief bank supervisor Claudia Buch emphasized the need for more rigorous discourse on how banks should adapt to novel risks, especially in the realm of climate change. She pointed out deficiencies in banks' information systems that are crucial for managing such uncertainties.

Pioneering ESG Provisions in European Banks

An example of a bank taking progressive steps towards accounting for environmental and social risks is Rabobank, headquartered in the Netherlands. In March, the bank announced its initiative as an industry frontrunner by setting aside €13.6 million ($14.6 million) in ESG provisions for 2023. This move intends to safeguard against potential chronic climate events such as floods and droughts in the future. Despite its small scale, Rabobank considers this an essential step towards integrating the impact of prospective environmental occurrences into their financial provisions.

ECB Intensifies Scrutiny on ESG Risk Management

The ECB’s growing activism in pressing lenders to view ESG risks, particularly those associated with climate change, as significant financial considerations is notable. It has executed climate stress tests and hasn't shied away from threatening fines against banks that neglect these ESG risks.

Surprisingly, a study by the ECB in 2023 revealed that close to three-quarters of corporate loan books held by European banks were exposed to nature-related risks. Frank Elderson, a member of the ECB Executive Board, reinforced the bank's determination to ensure banks actively manage the risks tied to climate change.

Elderson reiterated these points alongside an ECB report that highlighted a concerning reality: about 90% of eurozone banks are not aligned with the global ambition of capping global warming to 1.5C. This high percentage, termed "staggering" by the ECB itself, has sparked annoyance within the financial sector, with many viewing the ECB as overreaching.

The Global Impact and Resistance to EU Regulations

EU regulations carry implications for all businesses with clientele within the bloc, including the European operations of US banks. However, it's the EU banks that feel the full force of the EU's stringent regulations, unlike their US peers.

In contrast, across the pond, the Federal Reserve has weighed in on global bank regulations pertaining to climate risk, with Bloomberg reports indicating a push to limit its influence. Jerome Powell, Chair of the Federal Reserve, has repeatedly stated that the Federal Reserve does not consider itself a "climate policymaker."

EU's Efforts Towards Stricter ESG Regulations and Banking Sector Feedback

This month marks a pivotal period for European banks, as they are provided with the opportunity to formally express their views on an essential aspect of the EU's efforts to enforce stricter ESG regulations. The banking industry has until April 18 to respond to a consultation initiated by the European Banking Authority. The consultation seeks input on how banks ought to handle environmental and social risks in their operations, including the calculation of capital requirements.

The European Banking Authority revealed that thus far, European bank initiatives to address ESG risks are in nascent stages and are insufficient to guarantee the resilience of institutions during the EU's transition to a sustainability-focused economy.


With the ongoing push for holistic ESG inclusion in the banking sector, European banks find themselves at a critical juncture. They must navigate a landscape of increasingly stringent regulations, all while vying for market standing against less regulated US competitors. The European Banking Federation and ECB play critical roles in shaping this transformation, dialoguing on the balance between prudential risk management and market competitiveness. As the responses to the EBA consultation are awaited, the industry's stance on the future of ESG in banking will become clearer, potentially signaling a new era for financial institutions.

©2024 Bloomberg L.P.

Read More: European Banks, ESG, and the Future of Finance