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Energy Transition May Be Subprime Moment for European Banks

The big risk is investments linked to fossil fuels plummet in value.

A giant excavator and mining machinery operate at an open pit lignite mine in Hambach, Germany.

Photographer: Jasper Juinen/Bloomberg

A rapid and chaotic energy transition would leave Europe’s biggest banks in financial peril comparable to the subprime crisis that U.S. lenders faced in 2008.

The 11 largest banks in the European Union, including BNP Paribas SA, Deutsche Bank AG and UniCredit SpA, have 532 billion euros ($648 billion) of investments and loans financing everything from extraction to transportation of fossil fuels, equivalent to 95% of their total common equity tier 1 capital (CET1), according to a report from think tank Rousseau Institute, Friends of the Earth France and fellow environmental nonprofit Reclaim Finance. A sudden drop in value of these “fossil-fuel assets” would deplete the banks’ capacity to absorb losses and might even leave them vulnerable to bankruptcy, the researchers said.