Climate change has become a systemic driver of financial instability. European banks, given their central role in credit provision and investment, are highly exposed to risks associated with the transition to a low-carbon economy. This study applies the CRISK methodology to estimate potential capital shortfalls under a severe climate stress scenario.

The results are striking: by the end of 2022, European banks faced an aggregate potential shortfall of €165 billion, heavily concentrated in France (€130 bn) and Germany (€27 bn). The exposure peaked in 2020 at almost €270 bn, a moment marked by the combined shock of the COVID-19 crisis and the energy turmoil triggered by geopolitical tensions. 

Although leverage and equity remain the dominant drivers of systemic risk, climate transition risk is increasingly material. Moreover, financial markets appear to recognize this: banks with higher transition exposures tend to offer lower returns, revealing the existence of a negative climate risk premium.

These findings underscore the urgency for supervisors, policymakers, and financial institutions to strengthen disclosure, integrate transition risk into prudential frameworks, and support a strategic rebalancing of portfolios toward sustainable assets.