“Simplifying physical risk adaption for banks in the EU“ was published on 25 September 2025 in the EBI Working Paper Series No. 198.

In this paper, we study the effectiviness of the two channels in which the financial system contributes to physical risks adaptation in the EU as per the NGFS (2024).  First, we assess the effectiveness of the level 3 prudential regulations on encouraging banks to include adaptation in their risk management and client engagement. Our analysis takes a broad perspective, encompassing not only prudential risk management but also transparency regulation.  We deem the latter most relevant to the extent that stakeholders can incentivize adaptation.  Secondly, we examine how banks finance adaptation and the factors that enable this process, drawing on recent financial literature. Our findings indicate banks should integrate adaptation to physical risks into stress tests, transition plans, and Pillar III disclosures. Transition plans must address physical hazards, exposure, vulnerability, and set adaptation targets. Adaptation measures should be treated as risk mitigants, with their severity and consistency reflected in transition plans and stress tests. Green bonds and green loans can serve as effective private financing channels for adaptation.