Banks in southern European countries such as Greece, Spain and Portugal are at the greatest risk of loan losses if no new policies are introduced to mitigate climate change, according to the results of the ECB's climate stress test.

Climate risks could have a "detrimental effect" on financial institutions, the ECB found, pointing especially to physical risks — which include flooding, wildfires, sea-level rise, earthquakes and hurricanes — as having a "potentially severe" impact on bank loan losses.

The exercise tested about 1,600 lenders, covering up to 80% of the bank loans held in the euro area, against three scenarios that account for different climate change risks over the next 30 years.

The ECB did not single out individual banks but pointed to institutions with portfolios in Greece, Cyprus, Portugal, Spain and Malta as being significantly more exposed to businesses that are subject to high physical risk compared with the rest of the euro area.

For the 10% of banks most at risk, credit portfolio probability of default would rise to 30% by 2050 compared with 2020 in a scenario where no new policy action is taken to mitigate climate change, it said.

Banks' exposures to transition risk — which arises from the introduction of climate change mitigation policies — are more homogeneous across countries, yet the ECB found that transition tail risk is concentrated in specific banks and countries. It said 4% of the sample, most of them located in Italy, Germany and France, accounted for 20% of total exposures and finance around 45% of all emissions.

The stress test was conducted by the ECB without the involvement of banks and will be used to inform a supervisory stress test next year, which will include data provided by financial institutions themselves.