adequate. in the overwhelming majority of cases, the banks that acknowledged the materiality of the c & e risks they faced did so for both transition and physical risks. and they acknowledged that these risks are material in both the short and the long term. despite this broad acknowledgement of the materiality of these risks, and thus the need to adequately manage them, we see that most banks still have a considerable way to go in developing their risk management capabilities. as the findings we published last year show, banks reported that 90 % of their practices are only partially or not at all in line with ecb supervisory expectations. let me repeat : 90 %. this is both bad news and good news. bad news because, at the time of their assessment, banks were a long way away from where they needed to be. but good news because half the banks we supervise already acknowledge that climate risks are an inevitable part of their day - to1 / 4 bis central bankers'speeches day business. we therefore expect banks to analyse how c & e risks can or will affect their portfolios and products over the short, medium and long term, and under various scenarios, too. this type of forward - looking analysis of c & e risk should be basic practice, just as it would be for any other type of risk. moreover, beyond merely formally attributing responsibilities, we still see banks making little progress towards more actively managing the c & e risks they face. even certain banks that recognise the materiality of c & e risks have not reported any practices to either reduce or manage their level of risk. this year we want to see firm progress in how banks incorporate c & e risks in their risk management. in doing so, banks should adopt a strategic approach to managing these risks, using the full array of the risk management instruments at their disposal. this includes strategically realigning portfolios, setting clear risk appetites, developing mitigation strategies, adjusting qualitative credit criteria and quantifying and holding capital. another key area in which banks can make progress is by actively supporting their clients in mitigating and adapting to the different types of climate and environmental risks. moreover, banks can draw on the industry ’ s good practices that we shared last year in our report. in the face of data challenges and methodological uncertainties, banks have an even stronger imperative to get moving. to be clear, banks should not misconstrue the ecb ’ s actions as an outright

more complex and potentially less liquid risks, for which they are ultimately rewarded. we are therefore witnessing a fundamental change in the business of banking from buy - and - hold strategies to so - called ‘ originate - to - distribute ’ models. while this change presents opportunities and challenges for risk managers and supervisors, it also serves as a useful framework for thinking about the changing risks at banks and other financial institutions. this shift in business models has been propelled by the rapid innovation in financial instruments, in particular the interaction of the credit derivatives markets with the rapid growth of securitisation technology. it has also been influenced by the rapid growth of the institutional investor base. there are many new players to whom risk can be distributed, such as hedge funds, loan funds, funds - of - funds, in - house hedge funds and mutual funds. in particular, we are witnessing a rapid growth in investor appetite to take on new forms of credit risk. these developments have created many opportunities to improve the way financial institutions manage their risk exposures and reduce their vulnerabilities to traditional types of credit stresses. risks are now more widely distributed outside the banking system. there are more tools to manage risk concentrations. risks, and how they are priced, have become more transparent. as a result, deteriorating credit exposures can be managed more actively at an earlier stage. new risks and risk management challenges the transformation of banks ’ business models has yielded substantial benefits. however, the move to originate - to - distribute models also provides a useful framework for examining new types of risks that banks face and for highlighting some of the shortcomings of more traditional measures to manage them. by traditional measures, i mean simple balance sheet ratios of capital adequacy, historical measures of potential losses on loan portfolios, or value - at - risk - based risk measures in the trading book. the originate - to - distribute business models depend on several key characteristics : • first, a growing reliance on liquid markets ; • second, a healthy risk appetite among various types of investors, in particular those taking on the more risky portions of structured credit assets ; • and third, a diverse investor base to whom risk is being distributed. ultimately, what we are concerned about is the ability to transfer or actively manage the various risks that core intermediaries face, not just under favourable market conditions, but also during periods when financial market, credit and liquidity conditions are less benign. when seen through this prism, there are a number of new risks that