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EU to test financial system's ability to help cut carbon emissions

A European Union flag flutters outside the EU Commission headquarters in Brussels

By Huw Jones

LONDON (Reuters) - The European Union's financial watchdogs will test the financial sector's resilience to shocks that could derail the bloc's push to meet a 2030 deadline for slashing carbon emission.

The EU's executive European Commission said in a letter to the EU's banking, securities and insurance authorities that they should conduct the one-off climate risk scenario analysis in cooperation with the European Central Bank.

All 27 EU states have committed to turning the bloc into the first climate-neutral continent by 2050, and have pledged to reduce emissions by at least 55% by 2030, compared to 1990 levels.

This will need extra investments totalling 350 billion euros ($370 billion) a year over this decade, not all sourced from the public sector, meaning a stable financial system will be needed for raising funds.

"This one-off exercise should go beyond the usual climate stress tests... looking also at contagion and second-round effects, thereby giving us a better understanding of the vulnerabilities in the financial system," John Berrigan, head of the commission's financial services unit, told the watchdogs in a letter published on Thursday.

"As part of this work, we would also appreciate any insights into the financial system’s capacity to support green investments under stress."

Any "policy relevant" conclusions should be provided to the commission no later than the first quarter of 2025, Berrigan said.

"The exercise should therefore be launched as soon as possible and could be based on end-2022 balance sheet data."

Transition to the 2030 goals could be derailed by adverse developments in the financial sector, and therefore it was important to anticipate shocks and to react swiftly if need be, Berrigan said.

"Results should be as differentiated (notably by countries, types of financial institutions, economic sectors) as possible," he said.

($1 = 0.9452 euros)

(Reporting by Huw Jones;Editing by Elaine Hardcastle)