A trillion dollars of climate risk - new research shows fossil fuel exposures of the world’s 60 biggest banks
The world’s largest banks carry more than $1.6 trillion in credit exposures to coal, oil and gas production and fossil-fuel power, according to research published today by Finance Watch.
"Banks have more than a trillion dollars of exposure to mispriced fossil fuel assets. This is a carbon bubble that could burst, like subprimes in 2008. This risk is not properly recognised and banks are not prepared.
Banks are effectively flying blind. Their risk models either look backwards or rely on forward-looking climate scenarios that fail to capture the complexities of climate change. That allows risk to keep building up. A sudden policy shift or major climate event could trigger sharp market corrections, sending fossil asset prices tumbling.
More worrying, their mispricing of fossil fuel loans keeps financing flowing into the industry, accelerating the climate crisis, and multiplying risks across the financial system." - Julia Symon, Head of Research and Advocacy at Finance Watch
The European Central Bank recently warned that “an insufficiently orderly transition to a green economy may translate into significant losses for the banking sector on exposures related to high-emission firms”.
Yet official data shows that climate risks are still not being incorporated properly into banks’ internal models.*
Finance Watch’s research offers a solution, at limited cost. A climate systemic risk buffer would provide banks with a dedicated cushion against fossil fuel losses and discourage the further buildup of climate risk, protecting the financial system and taxpayers from a crisis. It could be introduced without affecting banks’ ability to lend to the real economy.
According to Finance Watch’s calculations, it would be relatively easy to implement such a buffer at EU Banks, which would only need to retain a few weeks of profits to fund the additional capital.
“There is a glaring prudential gap that is causing climate-related systemic risks at banks to go unchecked. Our research shows that a climate systemic risk buffer would be a low-cost, high-benefit solution to curb the build-up of these risks and make banks more resilient. Crucially, it could be introduced without affecting EU banks’ lending capacity.“Policymakers cannot ignore a trillion dollars of mispriced climate risk sitting on bank balance sheets. The longer action is delayed, the greater the chance of a disorderly correction that will hit citizens and the wider economy.” - Greg Ford, the report’s author and Senior Advisor to Finance Watch
Current prudential approaches fall short
Conscious of the threat to financial stability, supervisors are requiring banks to quantify this risk for direct input into the existing risk management framework. The problem: quantitative tools like risk management models, stress tests and disclosure requirements are poorly suited to the non-linear, forward-looking nature of climate risk. They rely heavily on past data or on climate scenarios that systematically underestimate the scale and complexity of future climate impacts, giving a false sense of security to financial markets. So far, macroprudential threats caused by the buildup of climate risk remain largely unaddressed by regulators, leaving the financial system increasingly vulnerable.
Costs and benefits of a climate systemic risk buffer
Finance Watch calls for the creation of a climate systemic risk buffer, and shows how this could be calibrated through a loan-to-value approach. It would reduce taxpayer exposure by curbing the buildup of systemic risk early and shielding banks’ transition losses. It would also remove a market distortion on energy markets. Importantly, the buffer would have no impact on lending capacity at European banks (see report p.24), and a positive one on their competitiveness. Finance Watch calls on financial authorities to resolutely undertake regulatory action under their mandate from Article 501c of the Capital Requirements Regulation.
*UNEP-FI 2025 survey of 32 banks, p25