German Watchdog Raises Focus on Physical Risks Stemming From Climate Change

Banks often don’t have data on where their clients are located and what risks come with that, while insurers have gaps related to flood prevention measures or building policies of local authorities, said BaFin President Mark Branson.

“Banks especially are at the beginning on this issue,” he said in the text of a speech in Frankfurt on Tuesday. “They’re focused on building up data.”

European authorities have pushed banks to ensure they can contend with losses resulting from extreme weather or carbon-intensive companies struggling to pay back loans amid the transition to a greener economy. The physical risks have been underscored by wildfires in California, which could cost insurers tens of billions of dollars, and flooding in Spain last year, which Branson said is expected to drive up bad loans at that country’s banks.

“Of course the transition risks from the shift to a sustainable, lower carbon economy are still relevant,” said Branson. “But I think we have under-weighted the physical risks in regulation and supervision.”

Separately, Branson said that BaFin and European authorities will keep a closer watch on third-party providers that financial firms have come to rely on, such as cloud providers. Watchdogs also need to keep an eye on new technologies like quantum computing.

“Quantum computers will be able to overcome established encryption technologies,” he said. “Companies have to identify the data that could be endangered by quantum computing and then develop a protection plan.”

Photo credit: Alex Kraus/Bloomberg