60 largest banks need $210.2b to cover future fossil fuel losses: Finance Watch

Basel’s current framework encourages continued build up of risk, the nonprofit warned.

The world’s 60 biggest banks–which count banks from China, Japan, and Australia–will need additional capital of up to $210.2b in order to cushion against future losses related to their fossil fuel exposures, according to data analysed by Europe-based non-profit Finance Watch.

The amount is equivalent on average to around three to five months of banks’ 2021 net income. 

“This evidence suggests that increasing capital requirements for fossil fuel exposures in this way can be achieved without a reduction in lending capacity, which is important in the context of the sustainable transition,” Finance Watch wrote, adding that the proposed additional monetary requirement will also encourage supervisors to work with banks to establish plans over a suitable time frame.

Finance Watch warned that the current practice of not treating banks’ fossil fuel exposures as higher risk assets under the Basel framework encourages the continued build-up of prudential risk.

This continued practice also reportedly serves as a “subsidy” from banks to the fossil fuel industry, estimated to be worth around $18b a year.

Finance Watch estimated that these 60 banks have around $1.35t of credit exposures to fossil fuel assets. 

The non-profit applied a 150% risk weight – or the risk weight applicable for higher risk assets under the Basel framework – to banks’ existing fossil fuel assets globally as a Pillar 1 capital measure, and found that for these banks would require additional capital in the range $157b up to $210.2b to cover any fossil fuel losses.