Banking in a 3°C World: A Strategic Call for Resilience

The European Banking Authority’s (EBA) Risk Assessment Report - Autumn 2024 paints a vivid picture of a banking sector navigating escalating challenges. From rising geopolitical tensions to the pressures of transitioning to a sustainable economy, the vulnerabilities facing Europe’s financial institutions are mounting. Yet, these challenges are not isolated—they are interconnected threads of a broader, systemic transformation.

In a world heading toward a 3°C temperature rise, these stressors signal a new reality: one where resilience must replace sustainability as the cornerstone of strategic decision-making. The 3°C World Strategic Risk Policy? (SRP?) is not just an academic framework; it is a necessity. It equips governments, businesses, and societies to anticipate, adapt, and thrive amid profound disruptions.

A Fragile Financial System at the Crossroads

The EBA report outlines several critical risks that must be addressed if we are to secure financial stability in a warming world:

1. Geopolitical Risks Are Reshaping Financial Exposures

Europe’s banks are increasingly entangled in global uncertainties. Direct exposures to geopolitically high-risk regions—over €500 billion—are compounded by indirect risks such as supply chain disruptions and trade barriers. These vulnerabilities could cascade into higher credit defaults, operational costs, and market volatility.

2. The Climate Challenge: Beyond Compliance

Despite growing interest in green finance, the report highlights that the EU banking sector remains far from achieving meaningful taxonomy alignment. Most institutions report green asset ratios (GARs) below 3%, reflecting the nascent state of sustainable financing. This gap poses reputational and regulatory risks, especially as the specter of greenwashing looms large.

3. The Digital Frontier: A Double-Edged Sword

Digitalization offers unparalleled efficiency gains, but it also increases exposure to cyber risks. The banking sector has seen a surge in cyberattacks, with 2024 setting new benchmarks in both frequency and severity. For institutions already grappling with geopolitical instability, these threats compound the need for robust operational resilience.

4. Economic Headwinds: Slow Growth and Rising Volatility

Europe’s macroeconomic environment remains precarious, with uneven recovery, slow GDP growth, and inflation pressures. Market volatility—exacerbated by geopolitical instability and monetary policy shifts—has tested the resilience of bank capital, liquidity, and profitability.

Resilience: The Foundation of the 3°C World

The 3°C World SRP? offers a paradigm shift, integrating insights from risk analysis into actionable strategies that go beyond recovery. It addresses three critical pillars:

1. Anticipation: Risk is No Longer Linear

As highlighted in the report, the interconnectedness of risks—geopolitical, climate, and cyber—requires a shift from reactive to anticipatory management. For example, the “Fit-for-55” climate stress tests demonstrate how transition risks can destabilize the financial system if compounded by unfavorable economic conditions. Banks must adopt scenario planning that incorporates non-linear risk models.

2. Adaptation: Embedding Resilience Across Systems

Operational resilience must evolve from a compliance exercise to a strategic priority. The Digital Operational Resilience Act (DORA)provides a foundation, but true adaptation requires integrating ICT defenses with broader risk frameworks. For example, banks should align their cyber strategies with their geopolitical risk management, anticipating cascading impacts from nation-state conflicts or economic sanctions.

3. Transformation: Financing the Green Transition with Integrity

The transition to a sustainable economy presents a once-in-a-generation opportunity. However, this requires transparency and integrity. As the EBA report warns, greenwashing risks could erode trust in sustainable finance markets. Financial institutions must establish robust frameworks for verifying ESG credentials, ensuring that green finance becomes a catalyst for systemic change rather than a source of reputational risk.

A Call to Action: Banking on Resilience

The findings of the EBA report are a clarion call for the financial sector to embrace resilience as its guiding principle. This is not just about safeguarding institutions; it is about protecting the broader economy and society from the cascading impacts of a warming world.

The 3°C World SRP? champions a new way forward:

? Governments must foster regulatory environments that encourage proactive risk management and penalize short-termism.

? Financial institutions must redefine success—not just in terms of profitability but in their ability to absorb, adapt to, and thrive amidst disruption.

? Businesses and society must engage in the dialogue, recognizing that resilience is not a solitary endeavor but a collective mission.

The European banking sector stands at a crossroads. Will it rise to the challenge, leveraging its position as a cornerstone of the global economy to lead the resilience revolution? Or will it succumb to the inertia of “business as usual,” risking systemic fragility in the face of inevitable disruptions?

Link to the report