The European Union (EU) is set to significantly expand the powers of the European Central Bank (ECB), entrusting it with the oversight of risks associated with climate change and the burgeoning digital asset market.
This sweeping update, detailed earlier this week, positions the ECB at the forefront of monitoring the banking sector’s transition to a net-zero carbon economy over the next thirty years.
Under the new mandate, the ECB will also assume supervisory responsibilities for crypto asset services offered by banks. This expansion of authority comes as recognition of the ECB’s credibility, honed over a decade of serving as the EU’s primary banking regulator.
The ECB’s proactive approach, notably more assertive than the US Federal Reserve’s, has been instrumental in urging banks to address potential losses from extreme weather events and the risks posed by clients with significant carbon footprints.
The reform explicitly empowers the ECB to intervene in instances where a bank’s management of climate or environmental risks is deemed inadequate, posing a threat to financial stability.
This includes acting upon risks linked to the transition towards EU climate targets, as stipulated in the provisional agreement between the European Parliament and the Council of the EU, pending formal ratification.
This broadening of the ECB’s remit aims to alleviate tensions within European banking regulatory circles concerning the extent of the ECB’s push for climate accountability.
Some supervisory board members have previously expressed concerns about overstepping the ECB’s mandate, as reported by Bloomberg last year.
Additionally, the ECB will now supervise bank-operated units that provide crypto asset services. This move, inspired by the ECB’s former head of banking supervision Andrea Enria’s urgent recommendation last month, reflects the banking sector’s evolving stance towards cryptocurrencies like Bitcoin.
Initially cautious due to associated risks and money laundering concerns, banks are increasingly engaging in custody and other services related to crypto assets.
Furthermore, the EU is granting the ECB oversight of operational leasing businesses owned by banks, complementing its existing responsibility for financial leasing arms.
While not traditionally a focus of regulatory attention, the ECB has highlighted specific challenges, such as the IT integration issues at Societe Generale SA’s Leaseplan business.