Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the ECB Forum on Banking Supervision 2025
It is a pleasure to deliver the last keynote speech of this year’s banking supervision forum. Over the past two days, we have discussed what resilience means in times of challenge, complexity and disruption – and why resilience should be broad based.[1] As the Chair mentioned yesterday morning, broad-based resilience is about strong financials, but equally about operational resilience, sound governance and good risk management.
During this period of profound change, a debate on European competitiveness has emerged with full force. Many are asking what the key impediments and main enablers might be for a more competitive European economy. How can we tackle the former and improve the latter? And what role does the banking sector play in shaping the competitiveness of the real economy?
The good news is that over the past decade, much has already been achieved to make banks more resilient, and this resilience remains the indispensable foundation to support the real economy throughout the economic cycle. I will therefore start by illustrating this very welcome healthy state of the banks under our supervision.
At the same time, discussions about the complexities that are having an impact on European banks’ competitiveness have gained prominence. Today I would like to highlight how we are tackling undue complexities in the regulatory and supervisory framework in order to help banks operate efficiently within a predictable, proportionate and risk-based framework.
I will then illustrate how banks’ competitiveness crucially hinges on structural and macroeconomic factors that will require a concerted effort from a wide range of stakeholders. In this way, Europe’s banking system can be both innovative and strong, competitive and resilient. So, let me first start by looking at the resilience I mentioned at the start.
Bank resilience is crucial to withstand shocks and support the economy at all times
Resilient banks are a vital precondition for a thriving real economy. Why is this so?
Well-capitalised and resilient banks are better placed to channel funds from savers to borrowers to enable businesses to innovate, households to buy homes and governments to finance public goods. Banks must therefore be well regulated and supervised.[2]
European banking supervision was established in 2014 in response to the global financial crisis and subsequent European sovereign debt crisis. Now, almost to the day 11 years later, banks under our supervision are significantly stronger. Thanks to regulatory guardrails, rigorous supervision and continued improvements in banks’ risk management, the banking sector is now in a much better position to fulfil its essential function of supporting the economy at all times.
Today’s euro area banks have solid capitalisation levels, with a Common Equity Tier 1 (CET1) capital ratio of 16% compared with 12.7% a decade ago.[3]

Chart 1
Capital adequacy

Source: ECB supervisory banking statistics.

Banks have robust liquidity positions well above regulatory requirements[4] and the asset quality problems that plagued many significant banks across Europe a decade ago have been successfully tackled. In fact today the non-performing loans ratio stands at 1.9%, less than a third of the level observed ten years ago.[5]

Chart 2
Asset quality

Source: ECB supervisory banking statistics.

Moreover, euro area banks’ profitability has improved, with their return on equity now standing at 10.1%.

Chart 3
Euro area banks’ return on equity

Source: ECB supervisory banking statistics.

Encouragingly, stronger profitability is increasingly reflected in the higher valuations investors attribute to euro area banks, as shown by a price-to-book value of over 1.

Chart 4
Euro area median price-to-book ratio for publicly listed significant institutions (daily data)

Source: ECB calculations based on Bloomberg data

In addition to financial resilience, euro area banks have also improved their risk management and governance[6], and boosted their operational resilience[7].
Thanks to broad-based resilience banks have been an anchor of stability in undeniably challenging times.
In the past five years alone, we have dealt with the worst pandemic since the 1920s, the most devastating war on European soil since the 1940s, and the biggest energy shock and rise in inflation since the 1970s. Moreover, we are now seeing tariff levels and “beggar-thy-neighbour” trade policies reminiscent of the 1930s and a resurgence of great power rivalry similar to the Cold War of the 1950s, all while the climate and nature crises are getting worse.
Against this backdrop of change and complexity, the euro area banking system has fared well. Banks remained resilient and did not propagate shocks.. And this is no coincidence: well-capitalised and resilient banks do not excessively retreat in downturns, propagating adverse dynamics; instead, they continue to support the economy.[8] Think about what happened during the pandemic: banks continued to supply credit to struggling businesses and households, even in the direst of circumstances. Better capitalisation therefore makes the banking sector more resilient and better able to fund the real economy in good as well as bad times.[9] Fiscal and monetary support to households and firms clearly helped to shield the banks from higher credit losses.
So resilient banks yield a double dividend: not only are they safer and hence better able to withstand shocks, but they are also better able to continue playing their vital role of supporting the economy at all times. In that sense, resilient banks play an important role in contributing to competitiveness, especially in a bank-based economy like Europe.
Resilience must not, however, lead to complacency in an environment that continues to be complex and, in certain aspects, is becoming increasingly challenging. Geopolitical tensions are not expected to subside, ever more frequent and severe cyberattacks are here to stay, and the substantial growth of non-bank financial institutions, including their interconnectedness with the banking sector, demand our continued vigilance.[10]
Reducing undue complexities, overlaps and costs that may hinder competitiveness
At the same time we hear voices loud and clear about undue complexities in the regulatory and supervisory framework that may negatively impact banks’ competitiveness.
Looking at how the regulatory and supervisory framework evolved since the start of the banking union there is undoubtedly an increase in size but also complexity which is shaped by several factors.
A root cause of this complexity lies in the persistent fragmentation of rules at national level. Many facets of the current prudential framework, for example, do not actually consist of a single European regulation but of a patchwork of nationally transposed directives that create complexity. In addition, foundational elements of the prudential framework, such as accounting standards, securities and insolvency laws, continue to differ across Member States, which also adds unnecessary complexity.
Another root cause of this increasing complexity is that regulation and supervision have developed in lockstep with the complexity of the external environment in which the banks under our supervision operate. For example, the framework has evolved to make sure banks are operationally resilient, for instance, to ever more frequent and severe cyberattacks and operational failures.[11]And while this was very much warranted in light of a more complex external risk landscape, it has also led to regulation growing in size.
At the same time there is also a need to identify areas of unwarranted complexity, overlaps and unnecessarily prescriptive elements that may have built up over the past decade and which can and must be simplified.
Against this backdrop, we welcome the debate on simplification. The ECB’s Governing Council has created a High-Level Task Force on Simplification to develop proposals to simplify the European prudential regulatory, supervisory and reporting framework, while still maintaining resilience. The Task Force plans to deliver its proposals for simplification to the Governing Council by the end of the year, after which they will be presented to the European Commission.
As far as European banking supervision is concerned, we have been taking action for quite a few years now. Let me outline some of the initiatives that are already in full swing to make supervision more efficient, more transparent and more risk-based, without sacrificing resilience. This makes sure that we keep bank resilient in an efficient and effective manner and thereby reducing cost factors that may hamper competitiveness. We are proving that simplification and resilience are not opposing forces – they can go very well hand in hand.
The comprehensive reform of the Supervisory Review and Evaluation Process (SREP) that we embarked upon in 2022 is at the heart of our simplification initiatives. We have embraced risk-based supervision through initiatives like the risk tolerance framework and a multi-year approach, which allow our supervisory teams to focus more effectively on the underlying risks that matter the most. Practically speaking, this means that we are not looking every year at every risk in every bank.
The SREP reform is already delivering results: SREP decisions have become shorter and more focused, with SREP measures decreasing from 700 in 2021 to below 400 in 2025, with a stronger emphasis on addressing severe findings.[12] Moreover, issuing decisions by the end of October rather than the end of December means that key findings can be communicated more promptly. We are also enhancing our supervisory planning by improving the alignment of different supervisory activities, which helps banks to avoid duplicating their efforts.
In addition, we are reducing undue complexities and prescriptiveness by streamlining our supervisory processes through our “next-level supervision” project, which covers areas such as decision-making processes, internal models, stress testing, capital-related decisions, reporting and on-site inspections.[13] One concrete example is fit and proper assessments, where, thanks to the help of machine learning and technology, we have reduced processing times so that banks receive faster responses.[14]
Another example is a new fast-track process for simple securitisations, which was tested in the first half of 2025. This new process will cut approval times from three months to just ten working days.
An additional concrete simplification initiative is our drive to reduce reporting costs by establishing an integrated reporting framework that is accessible to statistical, prudential and resolution authorities.
We are also further embracing proportionality, which, although already embedded in the European regulatory and supervisory system, can be expanded further. Currently, small and non-complex institutions (SNCIs), which are banks that meet clear criteria for size, simplicity and limited trading activity, already benefit from lighter reporting templates and simplified liquidity and market risk standards, as well as streamlined recovery and resolution planning.[15] In practice, this means they are only required to report up to 30% of the data that large banks must report. They also benefit from less frequent on-site inspections. Therefore the SNCI regime seems the natural starting point to further enhance proportionality. For instance, one could consider a more systematic application of this regime, as well as an increased scope. These steps could be taken while maintaining the Single Rulebook, which ensures the risk-based nature of the prudential framework is retained for all banks. This is important, because proportionality should not be mistaken for simply reducing prudential standards for all smaller banks, irrespective of the risks this would generate. Instead, we should focus our attention on initiatives that reduce undue complexity, prescriptiveness and cost factors, without making banks less safe or causing them to lose track of the underlying risks.
In addition, while maintaining the current level of financial resilience among supervised banks, there is room to increase the predictability of how our supervisory assessments feed through to banks’ capital requirements. This enhanced predictability would help banks’ capital planning. Moreover, the risk-based capital stack in the EU is admittedly complex. With up to nine different layers of requirements and buffers, each serving a specific purpose that needs to be met with going and gone-concern funding instruments, the system can be difficult to navigate and, at times, create unintended interactions.[16] Thus there seems to be room to make the framework simpler and more transparent while maintaining resilience.
Banking sector competitiveness is shaped by multiple factors
Reducing undue complexities in regulation, supervision and reporting that may hamper banks’ competitiveness is essential. However the ability of euro area banks to compete with other actors – especially their international peers – is primarily shaped by a broad range of other factors, many of which are structural as well as macroeconomic in nature.
This becomes particularly clear when looking more closely at the profitability gap between euro area and US banks.[17] European banks, for instance, have a smaller home market and lower IT investments. US banks are more concentrated, with the largest ones operating across the entire country, which allows them to exert more pricing power and reap the benefits of economies of scale. European banks, on the other hand, do not have access to the same benefits because the Single Market is still fragmented.
Moreover, business volumes and profitability crucially depend on a dynamic real economy. As the Draghi report[18] convincingly shows, real GDP growth in the EU has been subdued in comparison with US growth over the last decade. And the robust economic growth in the United States, partly fuelled by its more advanced capital markets, has provided substantial benefits to banks. Thus, improvements in European banks’ competitiveness crucially hinge on revitalising growth in the European economy.[19]
Another factor shaping banks’ competitiveness is operating efficiency. Although euro area banks’ cost/income ratio has improved from 66% to 54% between 2020 and 2025, since 2021 this has been entirely driven by increasing revenues most notably net interest income, showing that there is still room for improvement when it comes to banks’ cost base.

Chart 5
Drivers of the change in euro area banks’ cost/income ratio

Source: ECB supervisory reporting.
Notes: The data show the year-on-year changes in the cost/income ratio (operating expenses as a share of net total operating income), along with the individual contributions of the numerator (“cost effect”) and denominator (“revenue effect”) to these changes. Lower values indicate an improvement in cost efficiency.

Boosting bank competitiveness by deepening integration and revitalising growth
Considering the myriad factors shaping European banks’ competitiveness and the fact that many of these factors have structural and macroeconomic root causes, real progress requires a concerted effort by a wide range of stakeholders. Let me outline some of the potential avenues that can sustainably move the dial when it comes to banks’ competitiveness.
One promising path for euro area banks to improve their operating efficiency is to enable them to reap the benefits of economies of scale by consolidating the highly fragmented sector. Larger, pan-European banks would also be better equipped to diversify risks, invest in digital transformation and compete in higher-margin, fee-based business areas. Such developments would not only strengthen banks’ competitiveness but also enable them to operate more effectively in the most profitable segments of the financial market, improve their profitability and optimise their liquidity management at the group level. From a supervisory perspective, we have repeatedly stressed that we see the benefits of cross-border mergers and have been crystal clear that we will not obstruct consolidation efforts, provided that the limitative set of regulatory criteria are met. These criteria essentially ensure that a merger results in the formation of a safe and sound bank.
At the same time, the ability of euro area banks to build pan-European business models and scale up their activity is additionally constrained by the fact that the banking union is incomplete. Completing it, including by establishing a European deposit insurance scheme, would help eliminate barriers that still hinder market integration and ensure that euro area banks can scale up and diversify geographically more easily.
Some financial instruments can also play a meaningful role in transferring risks away from credit institutions so that they are better positioned to meet additional lending demands from the real economy, while creating opportunities for financial market investors. As noted in the recently published ECB opinion on the securitisation package, the proposed regulations are a step in the right direction to make further progress at EU level to achieve economies of scale in the development of securitisation products, facilitate the expansion of the market, and support the integration of EU markets, all of which would broadly support the savings and investments union.
However, further integrating banking markets alone is no silver bullet for the competitiveness challenge banks are facing.
Looking at the real economy, the Draghi report shows that the widening GDP gap between the EU and the United States is primarily driven by weaker productivity growth in Europe. And when it comes to productivity, economists largely agree that one key reason for the gap is that Europe is adopting digital technologies more slowly and is unable to fully capture the efficiency gains of the digital transformation. Many firms remain behind the technological frontier.[20] In order to catch up, these firms need access to risk capital and to investors with networks and experience – which is why finalising the savings and investments union is vitally important for more efficient and more integrated capital markets.
Beyond capital market integration, the broader lack of a true Single Market further amplifies Europe’s competitiveness challenge. As I mentioned in a speech earlier this year[21],internal barriers to the Single Market are, on average, equivalent to a tariff of 44% on goods and a staggering 110% on services. And soberingly, 60% of barriers to trade in services are still the same as they were 20 years ago. So in order to boost productivity, unlock competitiveness and promote simplification, a time-limited roadmap to complete the Single Market is more important than ever. In areas where full harmonisation is currently politically or technically unfeasible, alternative approaches, such as introducing a “28th regime”, could provide a practical and effective interim step.
Conclusion
Let me conclude.
Europe stands at an important crossroads: to become a bulwark against external threats, ensure our strategic autonomy, and remain masters of our own destiny with good living standards for all Europeans, our economic prosperity is more important than ever.
And to safeguard our prosperity, we must bolster our competitiveness to ensure Europe is a place where innovators, creators and doers seek opportunity in the world’s second largest market. And if we are to succeed, a concerted effort from a wide range of stakeholders is essential.
Resilient banks have an important role to play. Banks that are innovative, strong and at the service of firms and citizens at all times, are an essential pillar of a competitive real economy.
And as supervisors, our single most important contribution is to make sure that banks continue to fulfil this role. Our job description is clear: maintain the public good that is financial stability. Because history has taught us – often in the hardest way during crises – that without financial stability, growth falters, progress fades, potential flounders, investment stalls, innovation slows and confidence slips away. But with the solid bedrock of financial stability, there is no ceiling to the innovation, progress and prosperity we can unleash.
Thank you for your attention.

Buch, C. (2025), “Global banking, global risks: how banks and supervisors can navigate a complex environment’’, keynote speech at the ECB Forum on Banking Supervision, Frankfurt, 13 November.
The traditional microprudential regulation of banks operates on a well-established logic. Banks finance themselves with high leverage, partly through insured deposits, which play a crucial role in preventing destabilising bank runs (see Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of political economy, 91(3), 401-419)). However, high leverage and deposit insurance also creates moral hazard: it incentivises bank managers to take on excessive risks, knowing that potential losses would be absorbed by creditors and taxpayers rather than the bank itself. The primary objective of capital regulation is to counteract this moral hazard by compelling banks to internalise potential losses. Another convincing explanation of the rationale of prudential supervision was outlined in the seminal book by Dewatripont, M. and Tirole, J. (1994), The Prudential Regulation of Banks, which states that supervisors’ task is to monitor banks to ensure they are safe and sound on behalf of depositors, as the latter are too small, dispersed and have neither the time nor the expertise required to understand the risks a bank is taking. That’s why supervisory authorities are assigned the task of ensuring financial stability. Moreover, after the great financial crisis, a credible and effective resolution framework to resolve failing banks in an orderly manner has been a key innovation to increase trust, protect taxpayers’ money and preserve financial stability.
Data on European banks refer to significant institutions under the direct supervision of the ECB. Please see the latest list of supervised entities as well as the latest available supervisory data that refer to the second quarter of 2025.
As of the second quarter of 2025, the liquidity coverage ratio stood at 157.8% and the net stable funding ratio at 126.7%.
In the second quarter of 2015, the comparable number was 7.5%. These ratios include cash balances at central banks and other demand deposits. The NPL ratio excluding cash balances at central banks and other demand deposits stood at 2.2% as of the second quarter of 2025.
Elderson, F. (2024), “The first decade of European supervision: taking stock and looking ahead”, keynote speech at the “10 Years of SSM – Looking back and looking forward” conference organised by the European Banking Institute and the Hessisches Ministerium für Wissenschaft und Kunst, Frankfurt am Main, 4 November; Elderson, F. (2024), “The art of bending without breaking – banking on operational resilience”, speech at the joint European Banking Authority and European Central Bank international conference on “Addressing supervisory challenges through enhanced collaboration”, Frankfurt am Main, 4 September; and Tuominen, A. (2025), “Operational resilience in the digital age”, The Supervision Blog, ECB, 17 January.
For why a broader view on resilience, including governance and risk culture, operational resilience and structural risk drivers are not peripheral issues but are at the core of prudential supervision, see Elderson, F. (2025), “What good supervision looks like”, keynote speech at the 24th Annual International Conference on Policy Challenges for the Financial Sector, Washington DC, 12 June; and Elderson, F. (2025), “Resilience offers a competitive advantage, especially in uncertain times”, keynote speech at the Morgan Stanley European Financials Conference, London, 19 March.
Boissey, F. et al. (2019), “Impact of financial regulations: insights from an online repository of studies”, BIS Quarterly Review, 5 March; Budnik, K., Dimitrov, I., Gross, J., Lampe, M. and Volk, M. (2021), “Macroeconomic impact of Basel III finalisation on the euro area”, Macroprudential Bulletin, No 14, ECB, July. See also Siciliani, P., Eccles, P., Netto, F., Vitello, E., Sivanathan, V. and van Hasselt, I. (2023), Paper 2: The links between prudential regulation, competitiveness and growth, Bank of England Prudential Regulation Authority, 11 September. On the usability of buffers for bank lending, see Couaillier, C. et al. (2021), “Bank capital buffers and lending in the euro area during the pandemic”, Financial Stability Review, November; and Couaillier, C. et al. (2022), “Caution: do not cross! Capital buffers and lending in Covid-19 times”, Working Paper Series, No 2644, ECB, February.
See Berg, J., Boivin, N. and Geeroms, H. (2025), “The quickly fading memory of why and when bank capital is important”, Working Papers, Issue 4, Bruegel; and Behn, M. and Reghezza, A. (2025), “Capital requirements: a pillar or a burden for bank competitiveness?”, Occasional Paper Series, No 376, ECB.
In relation to the significant growth of non-bank financial institutions that now accounts for over half of financial sector assets in the euro area, see Buch, C. (2025): “Hidden leverage and blind spots: addressing banks’ exposures to private market funds”, The Supervision Blog, ECB, 3 June; and Montagner, P. (2025), “Non-bank financial institutions: understanding transmission channels and regulatory challenges”, contribution for Eurofi Magazine, 17 September.
For example, the number of significant cyber incidents reported to the ECB more than doubled between 2022 and 2024.
Banks will be informed of their SREP outcome, key concerns and requirements/recommendations in a concise letter, with the main text expected to be around ten pages on average.
Buch, C. (2025), “Simplification without deregulation: European supervision, regulation and reporting in a changing environment”, speech at the Goldman Sachs European Financials Conference 2025, Berlin, 11 June; ECB, “Making European supervision more efficient, effective and risk-focused”; Donnery, S. (2025), “As simple as possible, but not simpler”, The Supervision Blog, ECB, 8 September.
For example, we reduced the average processing time from 109 days in 2023 to 97 days in 2024, and to as little as 61 days for non-complex cases, meaning that we can dedicate more time and resources to complex cases in line with our risk-based approach. For certain appointments, such as renewals of mandates, we will streamline the assessment process further.
Today, around 1,400 banks, or more than 70% of less significant institutions, are also SNCIs.
Buch, C. (2025), “Simplification without deregulation: European supervision, regulation and reporting in a changing environment”, speech at the Goldman Sachs European Financials Conference 2025, Berlin, 11 June.
Di Vito, L., Martín Fuentes, N. and Matos Leite, J. (2023), “Understanding the profitability gap between euro area and US global systemically important banks”, Occasional Paper Series, No 327, ECB, August.
Draghi, M. (2024), The future of European competitiveness, European Commission, September.
Donnery, S. (2025), “Less regulation, more growth? It’s not that simple”, speech at the SSM Senior Forum organised by A&O Shearman, Königstein im Taunus, 25 June.
Schnabel, I. (2024), “From laggard to leader? Closing the euro area’s technology gap”, inaugural lecture of the EMU Lab at the European University Institute, Florence, 16 February.
Elderson, F. (2025), “Europe at a crossroads: it is high time to complete the Single Market” , keynote speech at the SRB Legal Conference 2025, Brussels, 18 June.

 
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As carbon pricing continues to expand across countries and sectors as part of broader carbon mitigation efforts, design choices are increasingly diverse and flexible to reflect a variety of policy objectives including reducing emissions, raising public revenue, and strengthening energy affordability, energy security, and competitiveness, according to a new OECD report.
Effective Carbon Rates 2025: Recent trends in taxes on energy use and carbon pricing presents information on how countries are using carbon taxes, emissions trading systems (ETS) and fuel excise taxes.
Covering 79 countries that together account for 82% of global greenhouse gas emissions, this edition provides detailed and comprehensive 2023 data, with selected updates through 2025, and places a particular focus on ETSs.
The share of greenhouse gas emissions subject to a carbon tax or covered by an ETS reached almost 27% in 2023, up from 15% in 2018, across the 79 countries analysed in the report. Carbon taxes and emissions trading systems are now in place in over 50 countries. Since 2023, carbon pricing instruments have been introduced or are being considered in a dozen countries in Asia, Europe and Latin America and the Caribbean.
Changes in coverage are mostly driven by ETSs: coverage of emissions by carbon taxes remained stable between 2018 and 2023, at around 5%, while coverage by ETSs more than doubled, from 10% to 22%. The expansion of the Chinese national ETS to the aluminium, cement and steel sectors could further increase ETS coverage to 29% in 2025.
Sector coverage is increasing. ETSs are the main carbon pricing instrument used in the electricity and industry sectors, which together account for about two thirds of emissions. These systems are currently extending either to sectors historically covered by fuel excise and carbon taxes (such as buildings, transport), or to new sectors including international maritime transport.
ETS design is evolving. Many systems now set targets based on the carbon intensity of production, creating flexibility for fluctuations in production, instead of setting a fixed emissions cap as in cap-and-trade systems. In 2018, only two in 20 ETSs were intensity-based; by 2023, 12 out of 34 were, and these now account for 70% of emissions covered by ETSs. Similarly, accounting for current production levels in free allowance allocation methods has become more common, even in cap-and-trade systems.
For more information on the OECD’s work on effective carbon rates, visit https://www.oecd.org/en/topics/policy-issues/tax-and-the-environment.html. This link, and the above link to the report Effective Carbon Rates 2025, can be used in media articles.
For further information, journalists are invited to contact Elisabeth Schoeffmann at the OECD Media Office  (+33 1 45 24 97 00).
Working with over 100 countries, the OECD is a global policy forum that promotes policies to preserve individual liberty and improve the economic and social well-being of people around the world.
 
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Speech by Governor Michael S. Barr
Thank you for the opportunity to speak to you today.1 It is an honor and a pleasure to be here with you in Singapore, a crossroads for global trade and finance, to discuss the transformational nature of artificial intelligence (AI). Like other central banks around the world, including the Monetary Authority of Singapore, we at the Federal Reserve have been exploring the use of AI in our operations for quite some time as well as considering the implications of AI’s adoption for the financial sector and the broader economy.
At the Fed, we’ve been interested in the effects of AI on the economy and its role in the financial system for decades. Remarkably, in 1997, Governor Susan Phillips delivered a speech noting the use of AI in consumer loan underwriting.2 In the past year, no fewer than seven speeches by Fed Governors have had “AI” in the title.
Today I’ll discuss the opportunities presented by AI relevant for central bankers as well as the risks it may pose that policymakers should consider. I will leave you with three main takeaways.
The State of AI Innovation and Deployment
My first main point is that while AI is a big deal that will transform economies, there are a range of outcomes for how it could do so.
AI—algorithms that mimic human thought, communication, and choices—has been with us for decades, but AI entered a new era with the launch of ChatGPT in late 2022. Generative AI (GenAI) captured our imagination with convincing conversations in which it is possible to go deep on a wide range of topics. Earlier forms of AI were often the bailiwick of digitally native companies, but GenAI is spreading rapidly through the economy. As of 2024, three in four large companies were using GenAI, though some report it has yet to improve their bottom line.3 Smaller companies have been slower to adopt GenAI, with adoption rates reported in the high single digits, albeit with a high degree of heterogeneity among sectors. Also, one could surmise, based on other surveys of individuals, that work-related use is more widespread among employees than their CEOs realize.4
A recent survey by the Federal Reserve Bank of New York showed that firms plan to retrain their workforces to take advantage of AI to enhance productivity, with widespread layoffs limited.5 But survey respondents also report that AI has led firms to scale back hiring, a development that may be contributing to the recent low levels of job creation in the U.S. economy, a concern for many workers and particularly for newer entrants to the job market.
Taking a step back, as I have noted in the past, I see two basic scenarios for how AI can transform the economy.6 In the first scenario, there is incremental adoption of GenAI that augments existing tasks and jobs. In the second scenario, a revolution occurs. GenAI transforms the nature of work and leisure, boosting the efficiency of research and development, remaking industries, and creating firms with new—perhaps radically new—business models.
Right now, it is difficult to predict which scenario (or perhaps one or more intermediate scenarios) will come to pass.
We can already see incremental change as GenAI is increasingly integrated with standard workplace software. With its natural language interface, GenAI is inherently user friendly, so few workers need special skills or unusually onerous training to use it. At the same time, some start-ups have a more revolutionary flavor because they are centered on AI from the outset. One indicator of how the labor market is evolving toward deeper integration with AI is the skills mentioned in job postings. While overall the share of job listings that mention AI-related skills is small—about 5 percent—in the information sector, it is about 20 percent. The financial sector, where firms are always looking for a technological edge, is not far behind, with 1 in 10 job postings mentioning AI.7 So we can see that the skills needed in some key sectors are already changing. The speed of that change is likely to increase. If the AI changes happen gradually, workers and firms will have time to adjust, but if they happen rapidly, there may be significant dislocations in the short term.
A massive wave of data center investment has begun, pointing to signs of confidence among leading AI companies that the use of AI at scale throughout the economy is just around the corner. If they’re right and AI is useful enough to keep what is currently projected to be $3 trillion of new data center capacity utilized effectively, we can expect significant changes in economies. Investment in capital generally raises labor productivity and offers the potential for higher output growth without pressure on inflation over the longer term. As I have discussed in previous remarks, if these changes are significant, they can also affect the conduct of monetary policy.8 Of course, it may be the case instead that investment exceeds short-term demand, in which case there may be losses and adjustments to the AI sector.
AI and the Financial Sector
The second key point I would like to make is that the financial sector is adopting AI quickly, and while there are many benefits to this adoption, the risks will need to be managed carefully.
So far, AI adoption in the financial sector appears to be most concentrated in areas that can enhance operational efficiency, including applications that involve text analysis, classification, and information search inside the firm, as well as customer-facing functions. These incremental improvements to common business functions are a key reason to be hopeful about AI raising labor productivity in that sector.
At the same time, there is significant investment in experimentation with AI for core functions for financial services. Data-driven financial-sector-specific tasks, including credit decision support, fraud detection, and trading are using AI-specific tools. Ensuring that AI is used appropriately for these functions faces appreciable challenges.
First, the amount of organizational change needed by financial services firms to utilize GenAI may be substantial. History suggests progress may be slow. Adoption of machine learning, an AI technology that preceded GenAI, was concentrated in firms that were highly digitized from their founding—and even in those cases, adoption was a long process.9 Fintech firms organized to exploit AI from their founding can play a key role in driving efficiency forward in the sector, providing services to the incumbent firms.10 But productivity may even decrease in the short term, as heavy investments in business-process improvements take time to play out to productivity gains.
A second challenge is the practical constraints of rushing into AI for core business activities in the financial sector, as firms need to ensure that the resulting processes and outcomes are consistent with relevant laws and appropriate risk management. Large institutions are exploring the use of GenAI, including agentic AI, in their financial models—but doing so requires care. To successfully leverage the potential of GenAI on a sustainable basis, decisions based on those models must be well controlled, numerically and legally precise, explainable, and replicable. AI developers still struggle to some extent with all of those criteria. We need to reduce the risk that AI reinforces biases in consumer lending. And we also need to guard against the risks that could result from the use of AI in financial markets. For example, profit maximization by AI-powered trading algorithms may result in tacit collusion, market manipulation, or trading strategies that result in significant market volatility or even systemic risk.11
We will need innovation that is responsive to these risks to see additional advances in the use of AI for a broad array of core financial services functions.
AI and Central Banking
A third and final point I would like to leave you with is that central banks, including the Fed, need to keep up with AI by increasing our speed of adoption for our own operations.
The nature of central banking work is inherently careful, considered, and measured when evaluating anything new. This is particularly true for any new technologies.12 But it seems clear already that the many advantages offered by AI could assist central banks in at least some of their operations, and the speed at which this technology is moving makes it appropriate to proactively engage in using AI for our own operations. That is why the Federal Reserve is using AI, where appropriate, to increase staff efficiency and effectiveness. My view is that GenAI is a transformative technology that central banks need to remain engaged with to ensure an ability to execute as technology evolves.
As we push ahead on efficiency gains, it is important that we leverage the right tools for the task at hand, recognizing that GenAI is not always the best choice. Some of the challenges that we face can be addressed by robotic process automation or traditional AI methods. These are the same kinds of questions that every business and organization considering AI should be weighing.
At the Federal Reserve, we have focused on ensuring we can leverage AI capabilities by establishing an AI program and governance framework for the use of AI technologies.13 We are taking an enterprise-wide approach of learning-by-doing and broadly adopting high-value uses of GenAI, such as writing, coding, and research activities. We have taken a “hands on keys” approach to having staff engage with it. We are identifying the business processes that can be improved and transformed with the technology.
One internal application of GenAI I am particularly excited about that helps us achieve all these goals is technology modernization. We are applying GenAI-enabled tools within clear guardrails to translate legacy code, generate unit tests, and accelerate cloud migration. So far, the result of this usage is faster delivery, improved quality, and enhanced developer experience. And it will likely mean better outcomes in support of the American people.
Given AI’s current and prospective role in economic activity, we are devoting the necessary resources to understanding it, including by analyzing not only AI’s economic and financial implications, but also exploring how AI can enhance our financial stability work, strengthen supervisory and regulatory capabilities, and ensure the smooth functioning of our payment systems.
These are just some of the ways that the Fed, like other organizations, is using AI to make us more productive and capable. These efforts may also help us understand the effect of AI on the economy, the banking system, and the payment system. That task will be a major job for central banks in the years ahead. AI has the potential to fundamentally change the economy and society. And as central bankers, we need to keep up.
Thank you.
 
1. The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee. Return to text
2. See Susan M. Phillips (1997), “Risk Management,” speech delivered at the Asset/Liability and Treasury Management Conference of the Bank Administration Institute, Chicago, November 4. Return to text
3. See Aditya Challapally, Chris Pease, Ramesh Raskar, and Pradyumna Chari (2025), “The GenAI Divide: State of AI in Business 2025,” MIT NANDA Report, July, https://mlq.ai/media/quarterly_decks/v0.1_State_of_AI_in_Business_2025_Report.pdf. There are a range additional surveys with various results; see, for example, Richard Horton, Jan Michalski, Stacey Winters, Douglas Gunn, and Jennifer Holland (2025), “AI ROI: The Paradox of Rising Investment and Elusive Returns,” October 22, https://www.deloitte.com/uk/en/issues/generative-ai/ai-roi-the-paradox-of-rising-investment-and-elusive-returns.html. Return to text
4. On adoption by large firms, see McKinsey & Company (2025), “The State of AI: Agents, Innovation, and Transformation,” November 5, https://www.mckinsey.com/capabilities/quantumblack/our-insights/the-state-of-ai. On adoption by smaller firms, see the Business Trends and Outlook Survey from the U.S. Census Bureau, which is available on its website at https://www.census.gov/programs-surveys/btos.html. On adoption by individuals, see Alexander Bick, Adam Blandin, and David J. Deming (2024), “The Rapid Adoption of Generative AI,” Working Paper Series 32966 (Cambridge, Mass.: National Bureau of Economic Research, September; revised February 2025). Return to text
5. See Ben Hyman, Jaison R. Abel, Natalia Emanuel, Nick Montalbano, and Richard Deitz (2025), “Are Businesses Scaling Back Hiring Due to AI?” Federal Reserve Bank of New York, Liberty Street Economics (blog), September 4. Other surveys have shown similar results; see, for example, Jeremy Korst, Stefano Puntoni, and Prasanna Tambe (2025), “Accountable Acceleration: Gen AI Fast-Tracks Into the Enterprise (PDF),” 2025 Report, October 29. Return to text
6. See Michael S. Barr (2025), “Artificial Intelligence: Hypothetical Scenarios for the Future,” speech delivered at the Council on Foreign Relations, New York, February 18. Return to text
7. Job-posting statistics are based on the classification by Lightcast and are calculated using the methodology developed in Daron Acemoglu, David Autor, Jonathon Hazell, and Pascual Restrepo, “Artificial Intelligence and Jobs: Evidence from Online Vacancies,” Journal of Labor Economics, vol. 40 (April), pp. S293–340. Data are available by subscription from Lightcast at https://lightcast.io. Return to text
8. See Michael S. Barr (2025), “Artificial Intelligence and the Labor Market: A Scenario-Based Approach,” speech delivered at the Reykjavík Economic Conference 2025, Central Bank of Iceland, Reykjavík, Iceland, May 9. Return to text
9. See Timothy Bresnahan (2024), “What Innovation Paths for AI to Become a GPT?” Journal of Economics & Management Strategy, vol. 33 (Summer), pp. 305–16. Return to text
10. See Michael S. Barr (2025), “AI, Fintechs, and Banks,” speech delivered at the Federal Reserve Bank of San Francisco, San Francisco, April 4. Return to text
11. The most recent Financial Stability Report is available on the Federal Reserve Board’s website at https://www.federalreserve.gov/publications/files/financial-stability-report-20251107.pdf. Return to text
12. A report from the Bank of International Settlements notes that central bankers have the prospect of improving data quality, enhancing operations, and improving decisionmaking with the use of AI and provides a framework for considering questions of governance and risk management when doing so; see Bank of International Settlements (2025), “Governance of AI Adoption at Central Banks (PDF),” January. Return to text
13. See the “Board of Governors of the Federal Reserve System Compliance Plan for OMB Memorandum M-25-21,” which is available on the Federal Reserve’s website at https://www.federalreserve.gov/publications/compliance-plan-for-OMB-memorandum-m-25-21.htm.
 
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The Council and the European Parliament reached a provisional deal on a regulation concerning new rules aimed at combating cross-border unfair trading practices in the agricultural and food supply chain.
This regulation aims to improve cooperation between EU authorities responsible for enforcing rules on unfair trading practices in the agricultural and food supply chain. It is part of the EU’s efforts to support farmers’ position in the supply chain.
“I am happy that we have reached a compromise with the European Parliament on the proposal on unfair trading practices in the food supply chain in relation to the cooperation between member state authorities. This does not change the directive on unfair trading practices, but this compromise will ensure a smoother cooperation across member states on enforcement, without adding unnecessary bureaucracy for the agri-food sector.”

Jacob Jensen, Danish Minister for Food, Agriculture and Fisheries

Main elements of the agreement
The agreement sets up a comprehensive set of rules for cross-border cooperation against unfair trading practices in business-to-business relationships within the agricultural and food supply chain. It improves transnational cooperation in cases where suppliers and buyers are located in different member states.
The regulation introduces a mutual assistance mechanism, which would enable national enforcement authorities to ask for and exchange information or to collaborate on investigations related to unfair trading practices. It will also allow them to coordinate enforcement actions and notify other member states about decisions related to unfair trading practices.
Furthermore, the new piece of legislation introduces rules on the covering of costs in cases of mutual assistance, on data protection and confidentiality of information to ensure that suppliers remain safe from retaliation.
The legislation also establishes a mechanism for coordinated action in cases of large-scale cross-border unfair trading practices involving at least three EU countries. In such cases, a member state would be designated to coordinate the response.
The regulation contains rules for cooperation between member states in cases of unfair trading practices by buyers from outside the EU, in order to better protect European farmers.
Next steps
The provisional agreement will now be endorsed by the Council and the Parliament, before being formally adopted.
Background
In 2019, the directive on combating unfair trading practices entered into force with the aim of addressing imbalances in bargaining power between suppliers and buyers of agricultural products. In particular, its goal is to protect farmers who, for instance, sell their products to large supermarkets and food processing companies.
Based on the experience gained since then, the Commission considered that the cross-border dimension of unfair trading practices needed to be addressed. In fact, on average, around 20% of agricultural and food products consumed in an EU member state come from another member state.
The Commission published its proposal in December 2024, as part of the EU’s efforts to improve farmers’ position in the agrifood supply chain. The proposed rules also directly reflect several recommendations of the strategic dialogue on the future of EU agriculture and respond to some of the most pressing challenges that the agricultural sector faces.
 
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Blog post by Hites Ahir, Nicholas Bloom, Davide Furceri
Amid rising geopolitical rifts and trade tensions, global economic uncertainty has surged, yet sentiment about economic prospects remains positive
Major policy shifts this year have been adding to unknowns about the future and policy decisions, according to our World Uncertainty Index, which has doubled since January.
Uncertainty has surged to an exceptionally high level globally, and it’s likely here to stay, as the IMF noted during the recent Annual Meetings.
To better understand what causes this and what it reveals, we developed a new subcomponent of that measure, the World Policy Uncertainty Index, which, like its counterpart, is drawn from textual sources. Our new gauge tracks reports by the Economist Intelligence Unit by tallying country-level references to “uncertain,” “uncertainty,” and “uncertainties” in passages related to “policy,” “policymaking,” as well as words related to politics, such as “election,” “government,” and “vote.” It covers 71 advanced countries, emerging markets, and developing economies.
The Chart of the Week shows that a recent record monthly level for policy uncertainty was accompanied by relatively upbeat readings for our World Sentiment Index—echoing recent IMF forecasts that the global economy remains resilient and is slowing only modestly. This resilience can be attributed to improved policies, especially in emerging markets, alongside better business adaptability—but elevated uncertainty may be a new normal.
In addition, despite high uncertainty, beliefs about current and future economic prospects remain positive. Our sentiment index, which tracks the same 71 economies in Economist Intelligence Unit reports, uses word lists developed in a 2016 paper by Herman Stekler and Hilary Symington to assess views of the economic outlook. The approach groups and weights terms ranging from positives, like “solid” and “steady,” to negatives, such as “crisis” and “recession.” Index levels are negative during major global recessions and spikes in uncertainty—such as the global financial crisis and the pandemic. Although the index temporarily dipped earlier this year, it remains positive and above the historical average.
—For more, see “Uncertainty about Uncertainty,” in the September 2025 issue of Finance & Development and a related 2023 blog, “Global Economic Uncertainty Remains Elevated, Weighing on Growth.” The methodology is based on a February 2022 National Bureau of Economic Research working paper. Nicholas Bloom is a professor of economics at Stanford University, and a co-director of the Productivity, Innovation and Entrepreneurship program at the National Bureau of Economic Research.
 
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At the COP30 UN Climate Change Conference in Belém, Brazil, from 10-21 November, the European Union will reaffirm its strong commitment to climate action. The EU is dedicated to paving the way toward a global transition that is clean, fair, and resilient. This transition aims to provide clean and affordable energy, create business opportunities, stimulate growth, enhance industrial competitiveness, and leave no one behind.
The conference is a pivotal moment to step up action to meet the Paris Agreement goals set ten years ago. In these times, it is important to show up for the multilateral system and our partners across the world, in particular the small islands and least developed countries that are the most affected by climate change. The EU will continue leading these efforts, acting as a reliable and ambitious partner that is delivering at home, driving cooperation and decarbonisation abroad, and staying the course to achieve climate neutrality by 2050.
European Commission President, Ursula von der Leyen, said: “At COP30 this week, we will underline our strong commitment to the Paris Agreement. The global clean transition is ongoing and irreversible. It is our priority to ensure that this transition is fair, inclusive and equitable. In Belém, we will listen to our global partners and discuss the key issues. To keep our shared goal in sight, we must recognise diverse national realities and work together to deliver.”
At COP30, the EU will call for a collective response to the ambition and implementation gaps of climate targets, accelerating the global clean energy transition, minimising the extent and duration of any overshoot beyond 1.5°C, and the full implementation of COP commitments such as the first Global Stocktake (GST) under the Paris Agreement and the Global Pledges to triple the installed capacity of renewables and double the global rate of energy efficiency improvements by 2030. These proposed outcomes are aligned with the recently adopted Global climate and energy vision, the EU’s external engagement strategy with global partners where the focus lies on driving the global transition away from fossil fuels towards renewables, energy efficiency, and climate resilience, with the Union remaining committed to supporting partner countries in fulfilling these goals.
This year’s conference should notably follow up on the GST and the recent UN Synthesis Report on the new national climate plans, known as Nationally Determined Contributions (NDCs), building on the progress achieved and setting out how to step up and accelerate the implementation of COP28  commitments.
All COP Parties were requested to submit their new NDCs ahead of COP30. The new EU NDC, which will now be submitted to the United Nations Framework Convention on Climate Change (UNFCCC), is to reduce net GHG emissions by 66.25 –72.5 % below 1990 levels by 2035, covering all sectors of the economy and all GHGs. This is an ambitious milestone on the path to a 90% net reduction by 2040 compared to 1990 levels, leading the way towards EU climate neutrality by 2050 and aligned with Paris Agreement targets.
On carbon pricing and markets, the COP30 Presidency intends to launch the Open Coalition for Compliance Carbon Markets. This Coalition should bring together countries and jurisdictions who are either already implementing carbon pricing mechanisms or making a tangible progress towards that goal.
The EU negotiating team will also work towards reaching an agreement on the climate adaptation indicators under the UAE–Belém Framework for Global Climate Resilience, helping all countries track progress and strengthen preparedness.
Another important element in this COP30 will be climate finance. The ‘Baku to Belém Roadmap’ to be presented by Azerbaijan and Brazil will be a strategic opportunity to scale up finance for developing countries to at least $1.3 trillion per year by 2035, with engagement from all actors within and beyond the UNFCCC, and with particular attention to the needs of the most vulnerable, especially Least Developed Countries and Small Island Developing States. As the world’s largest contributor of public climate finance, the EU and its Member States together provided in 2024 €31.7 billion from public sources and mobilised a further € 11 billion in private finance.
Members of the College present at the COP30
On Thursday, 6 November, President von der Leyen will participate in the General Plenary of the World Leaders’ Summit, which officially starts the COP30 conference.
On Friday, 7 November, President von der Leyen will take part in a ‘High-Level Roundtable on Industry Decarbonisation’, which will discuss how to guide the world industry towards low and clean energy sources. Later, President von der Leyen will participate in a dedicated session to the energy transition.
Executive Vice-President Ribera participated this week in the ‘COP30 Local Leaders Forum’ in Rio de Janeiro, ahead of the high-level segment in Belém. Commissioner Hoekstra will again lead the EU negotiating team at COP30, working closely with the Danish Council Presidency and Member States to deliver on the negotiating mandate approved on 21 October. Commissioner Jørgensen will participate to the COP30 Energy Days and attend other high-level energy related events, including co-chairing the Global Methane Pledge with Canada.
In the margins of the conference, the members of the College in Brazil will hold meetings with national authorities, representatives from international organisations, civil society, and the private sector.
Background
Under the 2015 Paris Agreement, 194 countries agreed to keep average global temperature change well below 2°C and as close as possible to 1.5°C by the end of the century. To do this, they agreed to submit NDCs which represent their individual emissions reduction targets. The European Union is firmly committed to the Paris Agreement, having already cut its greenhouse gas emissions by 37% since 1990, while growing its economy by almost 70%, accounting only for 6% of global emissions. This steady progress keeps Europe firmly on track to cut emissions by at least 55% by 2030 and to achieve climate neutrality by 2050. Such transition is supported by a robust package of legislative measures, including the expansion of carbon pricing, the Social Climate Fund, and unprecedented financial support from the Innovation and Modernisation Funds.
 
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By Petra Köhler-Ulbrich, Yuma Schuster and Nikoleta Tushteva

Banks consider the climate performance of firms and buildings in their lending policies. The euro area bank lending survey shows that lower climate risks tend to improve credit conditions. Meanwhile, green investments increase loan demand from firms and households.

Reducing a firm’s carbon emissions or improving the energy efficiency of a building can help businesses and households to get a loan from the bank at more favourable conditions, the euro area bank lending survey (BLS) finds. According to the banks surveyed, the climate performance of businesses and buildings also affects loan demand from firms and households.[1] In this blog post, we summarise these trends and explore what is behind them.
Climate risk and bank lending to firms
How do climate risks affect the lending conditions banks offer to green firms, high-emitting firms and those in transition to green? Overall, our survey shows that banks’ credit standards (i.e. their internal guidelines and loan approval criteria), terms and conditions for loans are notably affected by the climate performance of their clients. Since we introduced this question to the bank lending survey in 2023, banks have reported an easing impact of climate risk and measures to cope with climate change on their credit standards, terms and conditions for green firms and those in transition.
To put these findings into perspective, we need to take a closer look at how the BLS works. Every quarter, we ask about 150 banks from all euro area countries if they have tightened or eased their credit standards, terms and conditions for loans to firms and households, or whether they have kept them broadly unchanged compared with the previous quarter. The survey also asks banks whether the demand they see for loans has increased, decreased, or remained broadly unchanged. Banks also report on the factors which have driven such developments, as well as on their expectations for the future. In addition, the BLS asks banks some topical questions, which include the climate change-related ones we are discussing in this post.[2]
Back to our findings: as mentioned above, we see that climate risk and measures to cope with climate change had an easing effect on euro area banks’ credit standards for loans to green firms and companies in transition. In fact, in the July 2025 BLS a net percentage of banks of 20% mentioned an easing impact on their credit standards for green firms, and 13% for firms in transition over the past 12 months (Chart 1, panel a).
By contrast, climate risk had a tightening impact for loans to high-emitting firms, which have not made much progress with the green transition or have not even started it yet (reported by a net percentage of banks of 35%).[3] This suggests that banks offer a “climate discount” in their risk assessment to green firms and those in transition. Also, they seem to charge a “climate risk premium” for high-emitting firms.[4] In other words, banks seem to grant loans at more favourable terms to environmentally friendly companies and those investing to become greener. That suggests that banks consider climate risks and measures to cope with climate change in their overall risk management.
We will now take a closer look at the different factors banks consider when giving out loans to firms. In their lending policies, banks assess firms’ transition risk, affecting the firm-specific situation and outlook, for instance regarding creditworthiness and the value of firms’ assets. They also take into account firms’ physical risk, which can affect the value of collateral and the company value more generally (Chart 1, panel b).[5] The former are risks that arise from moving towards a carbon-neutral economy, which can lead to financial losses linked to adjustment processes. The latter captures firms’ exposure to a changing climate, including more frequent or severe weather events, and dwindling ecosystems.
Based on the survey results from 2023-25, both transition risk and physical risk had a tightening impact on bank lending policies to firms.
This impact could deepen in the future. Banks expect physical risk to tighten their credit conditions for firms in net terms over the next 12 months: 18% of banks expect a tightening impact, while 8% expect an easing impact. Meanwhile, banks expect a broadly zero net impact of transition risk over the next 12 months, with an equal share of banks (16%) expecting a tightening and an easing impact of transition risk. This difference of opinion between banks may hint at uncertainty about the future impact of the green transition.
Still, we see a striking shift on transition risk, with banks expecting a broadly unchanged impact of transition risk on their lending conditions over the next 12 months. This is significantly lower than the reported realised impact in the previous two survey rounds (Chart 1, panel b). It may be related to firms’ progress on the green transition. Banks also reported a beneficial impact of climate-related fiscal support over the past 12 months, improving the chances of loan approval and mitigating the financing costs for firms managing the green transition. This easing impact is expected to increase over the next 12 months.

Chart 1
Impact of climate change on credit standards for loans to euro area firms, and driving factors

a) Impact on credit standards for loans to firms

b) Impact of climate-related factors on bank lending conditions for loans to firms

Source: ECB (BLS).
Notes: In panel a), net percentages are defined as the difference between the percentages of banks reporting a tightening of credit standards (blue line) or a tightening impact of climate change (dots) and the percentages of banks reporting an easing or easing impact. The solid line refers to actual values over the past three months, while the dashed part of the line refers to banks’ expectations over the next three months. The dots refer to actual values over the past 12 months, except for the last dot, which refers to banks’ expectations for the next 12 months. Panel b) shows the main factors that contribute, according to the banks, to a net easing (negative values) or tightening (positive values) impact of climate change on bank lending conditions for firms. The climate-related question on firms was introduced in the July 2023 BLS and repeated annually.
The latest observations are for the third quarter of 2025 (past) and the fourth quarter of 2025 (expected) for credit standards, for the second quarter of 2024 – third quarter of 2025 (past), and for the third quarter of 2025 – second quarter of 2026 (expected) for the impact of climate change.

Next to the supply side, the BLS indicates that climate change also has an impact on demand for credit. According to the banks surveyed, climate change fuelled loan demand from green firms and firms in transition, especially for green investment purposes. Meanwhile, banks reported a dampening effect of climate change on loan demand from high-emitting firms (Chart 2, panel a). This could reflect the fact that these firms have not yet started the green transition or made little progress so far. In fact, banks reported that firms’ climate-related loan demand has been primarily driven by fixed investment like machinery, equipment and buildings. Banks also indicated corporate restructuring related to climate change in combination with preferential bank lending rates for green projects or technologies as drivers behind loan demand (Chart 2, panel b).[6] By contrast, high-emitting firms may have delayed green investment in part due to uncertainty about future climate-related regulation. This uncertainty was mentioned by a net 11% of banks as a factor dampening firms’ loan demand. Likewise, firm-specific financing conditions that are comparatively less favourable, and a possible lack of green management practices may have weighed on loan demand.[7] The BLS shows that banks expect these developments to persist over the next 12 months, as uncertainty about future climate regulation could continue to dampen firms’ demand for lending. Meanwhile, financing needs for fixed investment remain high and preferential bank lending rates and fiscal support for green investments could drive loan up demand.

Chart 2
Impact of climate change on demand for loans to euro area firms, and driving factors

a) Impact on loan demand to firms

b) Impact of climate-related factors on loan demand to firms

Source: ECB (BLS).
Notes: In panel a), net percentages are defined as the difference between the percentages of banks reporting an increase in loan demand (blue line) or a positive impact of climate change on loan demand (dots) and the percentages of banks reporting a decrease or negative impact. The solid line refers to actual values in the past three months, while the dashed part of the line refers to banks’ expectations for the next three months. The dots refer to actual values in the past 12 months, except for the last dot, which refers to banks’ expectations for the next 12 months. Panel b) shows the main factors that contribute, according to the banks, to the impact of climate change on bank loan demand. The climate-related question on firms was introduced in the July 2023 BLS and repeated annually. The factor “uncertainty about future climate regulation” was introduced in the July 2025 BLS.
The latest observations are for the third quarter of 2025 (past) and the fourth quarter of 2025 (expected) for demand for loans, for the second quarter of 2024 – third quarter of 2025 (past), and for the third quarter of 2025 – second quarter of 2026 (expected) for the impact of climate change.

Climate risk and bank lending to households for house purchase
Banks also take climate risk into account when lending to households for house purchase. While a high energy performance of buildings has had an easing impact on banks’ credit standards according to the survey results, the opposite has been the case for buildings with low energy performance. These are mainly old buildings which have not undergone any major energy modernisation (Chart 3, panel a).[8] So, for lending to households the same pattern holds true as for firm loans: households investing in houses with better climate performance tend to profit from better credit conditions.
As the BLS results indicate, physical risk of real estate had the largest net tightening impact on bank lending conditions of all the reported climate-related factors over the past 12 months (Chart 3, panel b). In net terms, the tightening impact of the energy performance of buildings (reflecting the transition risk of buildings) was small, as the tightening impact for some buildings was nearly compensated by an easing impact of energy performance for other, more environmentally friendly buildings.
Looking ahead, based on banks’ expectations, the easing impact of energy performance for buildings with high energy performance could outweigh the tightening impact for buildings with low energy performance over the next 12 months. By contrast, the net percentage of banks expecting a tightening impact from physical risk has increased. Overall, better energy performance of buildings could continue to improve lending conditions for housing loans, while physical risk seems to be a concern for a growing share of banks. Also, similarly to firm loans, climate-related fiscal support is expected to continue to have a beneficial impact on bank lending conditions for housing loans.

Chart 3
Impact of climate change on credit standards for housing loans in the euro area, and driving factors

a) Impact on credit standards for housing loans

b) Impact of climate-related factors on bank lending conditions for housing loans

Source: ECB (BLS).
Notes: In panel a), “EP” denotes “energy performance”. Net percentages are defined as the difference between the percentages of banks reporting a tightening of credit standards (blue line) or a tightening impact of climate change (dots) and the percentages of banks reporting an easing or easing impact. The solid line refers to actual values over the past three months, while the dashed part of the line refers to banks’ expectations over the next three months. The dots refer to actual values in the past 12 months, except for the last dot, which refers to banks’ expectations for the next 12 months. Panel b) shows the main factors that contribute, according to the banks, to an easing (negative values) or tightening (positive values) impact of climate change on bank lending conditions. The climate-related question on housing loans was introduced in the July 2025 BLS.
The latest observations are for the third quarter of 2025 (past) and the fourth quarter of 2025 (expected) for credit standards, for the second quarter of 2024 – third quarter of 2025 (past), and for the third quarter of 2025 – second quarter of 2026 (expected) for the impact of climate change.

Climate change also influences household demand for credit. According to the banks surveyed, the investment in the energy performance of buildings has been a key factor driving climate-related housing loan demand. BLS results show an increased loan demand over the past 12 months for buildings with high or medium energy performance, which are mostly new and relatively modern existing buildings (Chart 4, panel a). At the same time, while the European Commission finds that 75% of EU buildings have poor energy performance[9] and therefore require energy modernisation, banks reported that climate change actually weighed on loan demand in this segment. Looking ahead, banks expect a continued dampening impact of climate risks on household loan demand for buildings with low energy performance, suggesting some scepticism about the progress in energy modernisation of old buildings.
Meanwhile, investment in reducing the physical risk of real estate – e.g. making buildings resilient against storms or rising water levels – had only a small positive impact on housing loan demand over the past 12 months, although banks expect this impact to increase somewhat over the next 12 months (Chart 4, panel b). Similarly to business lending, banks consider uncertainty over future climate-related regulation to be a factor dampening housing loan demand. This may have contributed to postponing modernisation investment in existing buildings. Conversely, preferential bank lending rates aimed at enhancing the sustainability of real estate, along with climate-related fiscal support, had a positive impact on housing loan demand over the past 12 months and are expected by banks to continue to contribute positively in the next 12 months.

Chart 4
Impact of climate change on demand for housing loans in the euro area, and driving factors

a) Impact on housing loan demand

b) Impact of climate-related factors on housing loan demand

Source: ECB (BLS).
Notes: In panel a), net percentages are defined as the difference between the percentages of banks reporting an increase in loan demand (blue line) or a positive impact of climate change on loan demand (dots) and the percentages of banks reporting a decrease or negative impact. The solid line refers to actual values in the past three months, while the dashed part of the line refers to banks’ expectations for the next three months. The dots refer to actual values in the past 12 months, except for the last dot, which refers to banks’ expectations for the next 12 months. Panel b) shows the main factors that contribute, according to the banks, to the impact of climate change on bank loan demand. The climate-related question on housing loans was introduced in the July 2025 BLS.
The latest observations are for the third quarter of 2025 (past) and the fourth quarter of 2025 (expected) for demand for loans, for the second quarter of 2024 – third quarter of 2025 (past), and for the third quarter of 2025 – second quarter of 2026 (expected) for the impact of climate change.

Conclusion
The euro area bank lending survey indicates that the climate performance of firms and the energy performance of buildings matter for banks’ lending conditions. Banks have eased credit standards for firms and housing loans for buildings with a better climate performance and have made progress in managing climate-related risks.[10] Climate change also fuels loan demand by firms with better climate performance and those that are making substantial progress in the green transition, and by households for buildings with high and medium energy performance. Meanwhile, greater progress is needed for high-emitting firms and buildings with low energy performance, for which climate-related investment is currently delayed.
The views expressed in each blog entry are those of the authors and do not necessarily represent the views of the European Central Bank and the Eurosystem.
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See the euro area BLS, especially the reports in July 2023, July 2024 and July 2025.
The ECB reports on these developments by aggregating banks’ replies in “net percentages”, which is the difference between the sum of the percentages of banks responding “tightened/decreased considerably” and “tightened/decreased somewhat” and the sum of the percentages of banks responding “eased/increased somewhat” and “eased/increased considerably”. All in all, the exercise gives valuable insights and provides up-to-date information into how banks currently assess their own lending policies and loan demand. The BLS also provides valuable information about expected developments of lending conditions, which is relevant for monetary policy decisions. For detailed account of the method, see User guide to the euro area bank lending survey .
“Green firms” are defined as firms that contribute little or nothing to climate change; “firms in transition” are firms that contribute to climate change but are making relevant progress in the transition; “high-emitting firms” are firms that contribute significantly to climate change and have not yet started the transition or made little progress.
See Nerlich, C. et al. (2025), “Investing in Europe’s green future – Green investment needs, outlook and obstacles for funding the gap”, Occasional Paper Series, No 367, ECB, January; ECB (2022), Good practices for climate related and environmental risk management: Observations from the 2022 thematic review, November; and Altavilla, C., Boucinha, M., Pagano, M. and Polo, A. (2023), “Climate Risk, Bank Lending and Monetary Policy”, Discussion Paper, DP18541, Centre for Economic Policy Research, October.
For the impact of climate risk on collateral value, see ECB (2025), “ECB to adapt collateral framework to address climate-related transition risks”, press release, 29 July.
See also European Investment Bank (2025), Investment Report 2024/2025, Chapter 3 on “Enablers and constraints for firms’ investment”. The report highlights that grants and bank loans with favourable conditions, and targeted policy support more generally, are effective in spurring climate action.
See also Costa, H. et al. (2024), “Making the grass greener: The role of firm’s financial and managerial capacity in paving the way for the green transition”, OECD Economics Department Working Papers, No 1791, OECD Publishing, Paris.
Buildings with “high energy performance” are defined as new buildings or equivalent to new in their energy performance (Energy Performance Certificate A-B). Buildings with “medium energy performance” are defined as buildings with reasonably good energy performance, i.e. modern buildings/existing buildings with major energetic modernisation other than equivalent to new (Energy Performance Certificate C-E). Buildings with “low energy performance” are defined as buildings with poor energy performance, i.e. old buildings without major energetic modernisation (Energy Performance Certificate F-G). If no Energy Performance Certificate (EPC) is available, the bank may use the age of the building and whether a major energetic modernisation has taken place or the actual energy consumption of the building (i.e. the amount of energy consumed, typically measured in kWh) as a proxy. See also the EU Energy Performance of Buildings Directive (EU/2024/1275).
See the European Commission’s website for more information on the Energy Performance of Buildings Directive.
See “Supervisory Priorities for 2025-2027”, ECB, December 2024. See also F. Elderson, “Banks have made good progress in managing climate and nature risks – and must continue”, The Supervision Blog, ECB, 11 July 2025.

 
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The Council and the European Parliament negotiators reached a provisional agreement on measures to incentivise defence-related investments in the current EU budget to implement the so-called ReArm Europe plan, an EU initiative to increase defence spending and strengthen the EU’s military capabilities.
The agreement includes a landmark decision to associate Ukraine to the European Defence Fund, underscoring the EU’s enduring commitment to Ukraine’s security, resilience, and gradual integration into the European defence industrial base.
“The agreement reached today on incentivising defence-related investments in the current EU budget is an important milestone in implementing the ReArm Europe plan and in the EU’s progress towards increasing our defence readiness by 2030. We need to maximise our investments in defence and dual-use technologies to prepare for the future – together in Europe and with Ukraine”, — Troels Lund Poulsen, Minister for Defence of Denmark.
“Today’s agreement sends a strong message: Europe is determined to invest in its security and remove all hurdles in this direction. By opening key EU-programmes to defence-related investments, we are enhancing our efforts in strengthening Europe’s Defence Industrial and Technological Base. It is a necessary step towards a stronger, more resilient, and more capable Europe that is able to defend itself by 2030”, — Marie Bjerre, Minister for European Affairs of Denmark.
The provisional agreement reached today broadly maintains the general thrust of the Commission proposal, which aims to facilitate faster, more flexible and coordinated investments in the European defence technological and industrial base (EDTIB) by amending five EU regulations:
• the Digital Europe Programme
• the European Defence Fund
• the Connecting Europe Facility
• the Strategic Technologies for Europe Platform (STEP), and
• Horizon Europe
The co-legislators agreed to extend EU financial support within Horizon Europe to dual-use and defence-related companies, while largely maintaining the eligibility rules already present in EU instruments such as SAFE (‘Security Action for Europe Instrument’) and EDIP (‘European Defence Programme’).
In addition, co-legislators agreed to associate Ukraine to the European Defence Fund, thus creating new possibilities for Ukrainian entities to join in EU collaborative defence research and development activities in the future.
Next steps
The agreement reached today will have to be confirmed by both institutions before being formally adopted.
Background
The so-called ‘mini-Omnibus for defence’ is a package of legal changes proposed by the European Commission in April 2025 to make it easier for existing EU funds – normally meant for supporting regional development, innovation, industrial support, etc. – to be used also for strengthening the EU’s defence industry.
This initiative is complemented by the so-called defence readiness omnibus package presented in June 2025 by the Commission, which is currently being examined by the Council. Both proposals aim to incentivise defence-related investments and improve Europe’s defence readiness, as requested by the European Council in March 2025.
 
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By Anamaria Piloiu, Oleg Reichmann and Florian Resch
Climate risks affect credit ratings. And these, in turn, influence how banks can use securities as collateral to borrow money. This post takes a closer look at how the Eurosystem integrates climate change risks into its own collateral framework, through the credit risk channel.

Central banks must prepare for the financial risks that come with rising temperatures and fast-evolving green policies. In the Eurosystem, we are actively working to ensure that the euro area’s monetary policy framework keeps pace with the realities of climate change.
One area where these efforts have borne fruit is the incorporation of climate change risks (CCR) into credit ratings. These ratings are central to the Eurosystem’s collateral framework. These rules determine the quantity and type of assets banks can use as collateral when borrowing from the Eurosystem. Banks can only borrow central bank money if they provide assets of adequate credit quality, measured using ratings. If a bank fails to pay back, the Eurosystem can sell these assets to avoid potential losses.
However, if credit ratings fail to properly reflect climate risks, the Eurosystem may end up accepting overvalued, high-risk assets or applying insufficient safeguards. With this in mind, the Eurosystem works both with the external credit assessment institutions (ECAIs) accepted under its credit assessment framework – DBRS Morningstar, Fitch Ratings, Moody’s, Scope Ratings and S&P Global Ratings[1] – and its own in-house credit assessment systems (ICASs). This ensures that both external and internal ratings duly account for all sources of credit risk – including those stemming from the economic consequences of climate change. To this end, the Eurosystem regularly consults with credit rating agencies on how best to take climate change into account. It has also established standards for its ICASs.
Why climate-conscious credit ratings matter at the ECB
Whenever a bank borrows from the Eurosystem, it has to pledge collateral (i.e. the assets that secure the loan). Under the Treaty on the Functioning of the European Union, the Eurosystem can only accept “adequate collateral”. What this means depends largely on an asset’s credit rating. The better the rating, the more a bank can borrow relative to the face value of the asset. For example, an AAA-rated asset carries a lower “haircut” – that is the reduction of its market value acting as a risk cushion for Eurosystem – than one rated BBB. In other words, ratings really do matter.
A lack of sufficient experience and empirical evidence makes it more challenging to incorporate CCR into ratings compared with traditional risks such as financial health, business cycles, competition and innovation. This makes it harder to estimate the extent to which a borrower’s creditworthiness is affected by climate change.
Nonetheless, the ECB’s 2021 climate action plan made the integration of climate risks into all relevant elements of its collateral framework a priority, with a particular focus on credit ratings. The action plan set out a roadmap for making the euro area’s monetary policy framework more resilient to climate risks. This includes improving climate data, incorporating environmental risks into asset valuations and adjusting how the Eurosystem accepts and values collateral. In practical terms, the Eurosystem now requires that climate change be factored into all of the credit ratings used within its collateral framework.
Figure 1

How climate risks are integrated in the collateral framework via the credit risk channel

ICASs: Eurosystem central banks leading by example
All seven Eurosystem ICASs now account for climate change risk in their credit ratings. Managed by the national central banks, these systems mainly rate large and medium-sized businesses. They assess CCR using both quantitative tools and expert judgment. Meanwhile, ICAS analysts evaluate physical risks, such as those from floods and wildfires, and transition risks, such as those linked to carbon pricing and regulation.
Their analysis typically encompasses two stages:
• assessing exposure to climate change risk, using data on emissions, energy use and geographical vulnerability;
• evaluating the impact of these risks on creditworthiness, considering mitigating factors such as insurance, adaptation plans and carbon offsets.
The ICASs use internal carbon stress tests to simulate how transition risks affect company finances. Different jurisdictions apply different pricing scenarios, including the carbon price pathways of the Network for Greening the Financial System (NGFS) and statistical models. These inputs feed directly into the adjusted financial projections of credit issuers – i.e. borrowers’ expected financial performance – and can lead to changes in ratings.
In the case of physical risks, the ICASs use a range of tools to translate environmental hazards (floods, landslides, storms, etc.) into expected financial losses. To ensure consistency and comparability, several ICASs use climate indicators taken from a harmonised dataset developed across the Eurosystem. These indicators help the Eurosystem to better analyse the climate change risks that could affect monetary policy, price stability and the financial system. Crucially, in-house analysts assess not just risks. They also account for the climate opportunities that can enhance creditors’ financial performance, such as the benefits of the energy transition.
How do CCR affect in-house credit scores?
On average, 69% of the credit ratings of the seven ICASs currently include CCR assessments, accounting for 56% of the ICAS-rated collateral mobilised by banks. Some countries are approaching full coverage. This is in line with the ECB’s minimum standards for incorporating climate change risk into ICASs, which have been applicable since the end of 2024.
Across the Eurosystem, the share of ICAS ratings affected by climate risks is currently below 4%, and the adjustments made are typically limited to one rating grade. So climate risks do not have a major overall impact on ratings at present. Transition risks have a more pronounced effect on credit ratings and assessments than physical risks. Here, manufacturing, construction and trade are the most affected sectors. Some ICASs have upgraded ratings thanks to green investments or climate-aligned business strategies. In contrast, physical risks, particularly in the form of acute climate events such as floods, have led to rating downgrades, reflecting the economic damage and cost such events entail. These findings are broadly in line with our observations below on external agencies.
Figure 2

How climate risks are incorporated in ICAS ratings

ECAIs: progress made by external agencies on climate risk integration
As already noted, ICASs are only one side of the coin. The Eurosystem also accepts the credit ratings issued by five External Credit Assessment Institutions (ECAIs): DBRS Morningstar, Fitch Ratings, Moody’s, Scope Ratings and S&P Global Ratings. These agencies have also taken significant steps to integrate CCR into their rating frameworks, reflecting the growing recognition that climate risk also entails financial risk.
Rating agencies now include CCR as part of their analysis of environmental, social and governance (ESG) risks. They generally distinguish between physical risks and transition risks, and apply tailored methodologies and tools to different asset classes and sectors. Moreover, they are now expanding their scenario analyses, developing adaptation metrics and strengthening links between climate data and credit assessments:
• Moody’s uses Issuer Profile Scores and Credit Impact Scores to indicate the relevance of ESG risks. So far, the agency has rated the climate vulnerability of over 12,000 issuers, covering sovereigns, corporates and structured finance.
• Fitch Ratings applies ESG Relevance Scores and has developed Climate.VS – a tool that overlays physical and transition risk data with sector-specific climate vulnerability scores.
• S&P Global Ratings integrates ESG indicators into its sectoral methodologies and conducts forward-looking climate scenario analyses to assess financial resilience under different climate pathways.
• Scope Ratings includes an ESG pillar in its sovereign ratings methodology and is rolling out cross-asset climate stress testing, particularly for financial institutions and corporates.
• DBRS Morningstar incorporates ESG risks via structured checklists and leverages its partnership with Sustainalytics[2] to enhance sector-level analysis, especially for the automotive, energy and insurance sectors.
How do CCR affect external credit ratings?
The impact of climate risks on final credit ratings remains limited. ESG factors influence approximately 13% to 19% of all rating actions across the major agencies, but CCR-specific downgrades account for only 2% to 7%. That said, climate risks now play a greater role in the credit ratings of sovereigns, utilities and the automotive and insurance sectors. These are sectors with high emissions exposures and transition dynamics or direct sensitivity to extreme weather events.
The challenges ahead: from risk recognition to risk integration
Despite the notable progress made by both ICASs and ECAIs, several persistent challenges still limit the full and consistent integration of CCR into credit ratings.
While climate risks are widely recognised, they rarely lead to rating changes. There are several reasons for this:
• strong financials or diversification strategies can mask the vulnerabilities of some debtors;
• risk mitigation strategies (e.g. insurance or carbon offsets) can reduce their perceived exposure;
• rating horizons remain short and medium term, whereas climate risks tend to be long term.
Furthermore, reliable, granular climate change-related data remain scarce, particularly for smaller issuers, sovereigns and structured finance. Public disclosures vary, and asset-level exposure data (e.g. on property flood risk) are often unavailable.
Another challenge increasingly recognised as a financial risk is nature degradation and biodiversity loss. The major credit rating agencies seek to capture this through the environmental pillar of their ESG frameworks. Here, impacts such as deforestation, habitat loss and resource depletion can influence sector and issuer assessments, particularly in agriculture, forestry, fisheries and the extractive industries. Within the Eurosystem, the ICASs also consider these risks when they are deemed credit relevant.
By incorporating these aspects, the ECAIs and ICASs are expanding their coverage of credit-relevant sustainability risks further, thereby helping to ensure that credit ratings reflect a broader range of environmental challenges. However, modelling and data limitations remain more acute in this area.
Keeping climate disclosures on track
The regulatory landscape is constantly evolving, with both progress and potential setbacks. The ECB has pushed for further integration of CCR in banks’ internal models and has welcomed the EBA’s guidelines on ESG risk management. Climate stress testing and supervisory engagement help banks, ECAIs and ICASs to refine their methodologies and expand their climate coverage.
To ensure the continued availability of high-quality climate-related data, the ECB has underlined the importance of maintaining strong disclosure obligations under the Corporate Sustainability Reporting Directive (CSRD). The CSRD is the EU’s main sustainability framework and requires that companies publish detailed information on their environmental and climate impacts, as well as on their own exposure to climate and nature risks. This information is essential if credit rating agencies, banks and the Eurosystem are to properly integrate climate-related risks into their credit assessments and collateral management. In the context of the draft “Omnibus” package proposed by the European Commission, the ECB has stressed that these amendments must strike the right balance between retaining the benefits of sustainability reporting for the European economy and the financial system and ensuring that the requirements remain proportionate.
What comes next?
The Eurosystem’s work on embedding climate risk into credit ratings is not just about making technical adjustments; it also strengthens monetary policy implementation and ensures that the collateral framework is fit for a climate-affected future.
We will continue working closely with ICASs, credit rating agencies, financial institutions and EU lawmakers to refine methodologies, close data gaps and promote credible, science-based financial assessments. By acting now, we can help safeguard financial stability and curb the buildup of unpriced climate risk.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
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 The Eurosystem currently accepts five credit rating agencies in its credit assessment framework (ECAF). See this blog post.
Sustainalytics is a firm that rates how companies manage ESG risks and opportunities.

 
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Today, the Commission has published the State of the Energy Union Report 2025 and the accompanying Climate Action Progress Report 2025. They show the significant strides the EU has made in transitioning to a robust and integrated Energy Union by progressing on the clean energy transition with more renewables, addressing high and volatile energy prices and affordability, and further reducing greenhouse gas (GHG) emissions. This is increasing competitiveness, decarbonisation and strengthen energy security and independence reducing EU’s reliance on imported fossil fuels.
The reports confirm once again that the EU is well on track to meet its 2030 climate target, with a 2.5% decrease of GHG emissions in 2024 compared to 2023. The reports also outline how the EU has tackled evolving domestic and global challenges and highlight the crucial role of clean and affordable energy and continuous efforts cutting emissions in reaching EU’s security, energy independence, competitiveness and climate neutrality objectives. 
Progressing towards 2030 climate and energy targets
As confirmed in the Commission’s assessment of national energy and climate plans based on the National Energy and Climate Plans and latest greenhouse gas projections submitted by Member States, the EU continues to progress towards the 2030 targets of reducing net GHG emissions by at least 55% compared to 1990 levels and achieving at least 42.5% renewable energy in the EU energy mix.
Most of the electricity produced in the EU now comes from clean energy sources, although progress differs between Member States. The newly installed renewable energy capacity in 2024 is estimated at around 77 GW and the EU electricity mix counted 47% renewables already in 2024. Final energy consumption keeps going down, with a 3% decrease compared to 2022 mainly in the residential sector, followed by industry and services. 
Reaching the 2030 EU energy targets will require a much faster uptake of renewables and energy efficiency improvements in the coming years. 
GHG emissions in the EU continue to decline, with provisional data for 2024 showing how total net GHG emissions decreased by 2.5% compared to 2023. Emissions were 37.2% lower than in 1990 (or 39% when only domestic net emissions are considered), while GDP was 71% higher, meaning that economic growth continues to decouple from emissions. These figures are aligned with the European Environment Agency Trends and Projections report also release today.  
Lowering energy prices and enhancing competitiveness with clean energy sources
The implementation of the EU’s Affordable Energy Action Plan and Clean Industrial Deal is on track and remains crucial to bring relief to our industries and consumers both in the short and longer term. Nonetheless, average energy prices in Europe are still higher than our competitors, and largely differ across EU Member States, hindering the competitiveness of major industrial players and the economy overall. This is why, the Commission is taking this seriously and stepping up efforts to lower energy prices, building on a set of 7 key actions to bring quick and long-lasting relief to industries and consumers. This is a top priority for the EU and its Member States. The European Investment Bank for instance is launching a €1.5 billion programme to provide bank guarantees to European grid component manufacturers and a pilot project of €500 million in counter-guarantees for clean Power Purchase Agreements.
In the long term, a genuine Energy Union relying on domestically sourced clean energy generation and increased energy efficiency will reduce the EU dependence on fossil fuel imports even further, structurally lower energy prices and contribute to achieve our climate objectives. The EU has significantly reduced the share of Russian gas in its imports from 45% in 2021 to 12% by August 2025.
Electricity consumers in the EU already saved €100 billion thanks to electricity generation from new solar PV and wind power in 2021-2023, while every 1% of improvement in energy efficiency translated into a 2.6 % reduction in gas imports. This underlines importance of unlocking the potential of renewable energy and energy efficiency to enhance energy security and competitiveness.
Seizing the moment to complete the Energy Union
The next decade will be decisive in completing the Energy Union and in achieving climate-neutrality by 2050. The amendment of the European Climate Law, setting an EU climate target of 90% GHG emissions reduction by 2040 compared to 1990 levels is under negotiation. Once agreed by both co-legislators, it will be a benchmark for the post-2030 policy framework.
Several challenges are still to be addressed. The EU needs to deliver large-scale electrification, electricity in final energy to increase from 23% target today to around 32% by 2034 and substantially upgrade investments in grids, step up the efforts on energy efficiency and boost innovation to build a competitive clean tech sector. To overcome such challenges, the Commission estimates that the EU needs to mobilise €695 billion annually from 2031 to 2040 for energy related investments. The proposal for an ambitious EU Multiannual Financial Framework for 2028-2034 is geared towards reinforcing cross-border infrastructure and channeling funding towards strategic clean energy technologies. The upcoming revision of the Governance Regulation on the Energy Union and Climate Action as part of the post-2030 framework will be pivotal in this sense.
Background
The State of the Energy Union Report is published annually to take stock of the EU’s progress towards the objectives of the Energy Union made the previous year and is accompanied by a series of reports covering different aspects of the climate and energy transition. Today one of them is published: the Climate Action Progress Report.
The first part of the State of the Energy Union Report outlines measures taken to implement the Action Plan for Affordable Energy, to lower energy costs, attract investment, and make the energy system more resilient to crises. Building on Member States progress reports, the second part analyses the state of play in the implementation of the Energy Union in all its five dimensions. The last part is forward looking, paving the way to decisive actions to complete the Energy Union and prepare the climate and energy policy framework for the decade ahead.
The Climate Action Progress Report shows progress towards the EU’s emission reduction targets, covering actual (historic) emissions and projected future emissions for the EU as a whole and for every EU Member State. It also includes information on different climate policy areas, EU legislative progress, climate finance and adaptation.
 
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