The energy transition could be the time of subprime for European banks

LONDON: A rapid and chaotic energy transition would leave Europe’s largest banks in financial peril comparable to the subprime crisis that US lenders faced in 2008.

The 11 largest banks in the European Union, including BNP Paribas SA, Deutsche Bank AG and UniCredit SpA, have € 532 billion (US $ 648 billion or RM 2.67 trillion) in investments and loans financing everything from extraction to transportation of fossil fuels, or the equivalent of 95% of their total capital in Class 1 (CET1) ordinary shares, according to a report by the Rousseau Institute think tank, Friends of the Earth France and the environmental nonprofit Reclaim Finance.

A sudden drop in the value of these “fossil fuel assets” would deplete the ability of banks to absorb losses and could even make them vulnerable to bankruptcy, the researchers said.

While oil, gas and coal have fueled economic development since the industrial revolution, the level of carbon dioxide in the atmosphere is at record levels.

Scientists have warned that to avoid the most catastrophic impacts of climate change and meet the Paris Agreement target of keeping global warming below two degrees Celsius, emissions must be halved by the end. decade and reach net zero by 2050.

For banks, the risk is that fossil fuel assets will drop in value and eventually become illiquid, as business activities incompatible with a world of two degrees or less are abandoned.

“The devaluation of fossil assets held by banks, following the inevitable ecological transition, could produce significant turbulence or even generate a new financial crisis”, according to the report.

“The loss in value, however fast, could put the banks in a situation of bankruptcy.”

The potential of so-called stranded assets “reflects the subprime mortgage crisis,” the report says.

If fossil energy assets lost 80% of their value, like what happened to the price of mortgage bonds securitizing poor quality houses during the last financial crisis, the French Crédit Agricole SA and Société Générale SA would not have enough equity to cover their losses, and the equity of Deutsche Bank AG and Commerzbank AG is almost depleted, according to the report.

Fossil fuel assets are equivalent to 131% of Crédit Agricole’s CET1 capital, 109% for Deutsche Bank and 68% for Banco Santander SA in Spain, according to the study.

And this is only “the tip of a gigantic iceberg” when it comes to the potential exposure of banks to the risk of transition from other industries. Bloomberg

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