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FDIC Wants Big Banks to Measure, Plan for Climate Change Risks (2)

March 30, 2022, 3:16 PMUpdated: March 30, 2022, 7:40 PM

The Federal Deposit Insurance Corp. released an outline for how large banks should measure and plan for climate change risks.

The banking regulator’s proposed guidance, issued Wednesday, calls on banks with $100 billion or more in total assets to measure the risks that a warming planet poses to its operations. The document also calls for banks to assess how the transition to new energy technologies could impact their lending and credit portfolios.

“Climate-related financial risks pose a clear and significant risk to the U.S. financial system and, if unmitigated, may pose a near-term threat to safe and sound banking and financial stability,” the proposed guidance said.

The 17-page document provides the FDIC’s initial view on how large banks and their senior executives should incorporate climate change into the bank risk profiles, including analysis of climate scenarios. The FDIC proposes that big banks create climate “dashboards” that include exposure analysis to both physical and credit risks of climate change, as well as other risk measurements.

Acting FDIC Chairman Martin Gruenberg, a Democrat, listed climate risks as a top agency priority in February, after the departure of former FDIC Chairman Jelena McWilliams, a Trump appointee.

The Office of the Comptroller of the Currency issued its own climate change guidance in December. The FDIC’s proposed guidance largely tracks with the OCC’s outline.

The comment period on the FDIC’s proposed guidance runs for 60 days after its publication in the Federal Register.

Many large banks are already doing much of the climate change risk analysis that the FDIC and OCC are proposing, said Celeste Koeleveld, a Clifford Chance partner.

“You have to be doing this. If you’re examining your financial risks, how could you not be looking at these climate change risks?” said Koeleveld, a former general counsel at the New York Department of Financial Services.

New York issued its own climate guidance to state-regulated banks, cryptocurrency firms and other financial institutions in 2020. Koeleveld departed the DFS several years before the guidance was issued.

Tailored Guidance

The FDIC said it plans to issue tailored guidance to smaller banks that have different risk profiles and fewer resources to conduct climate risk analysis.

While smaller banks pose less risks to the U.S. financial system, climate guidance remains important at that level, Koeleveld said. Problems at a small bank can wreak havoc on a local community, she said.

Guidance for smaller banks could focus on specific business lines that face climate-related risks, such as residential or commercial mortgages in areas prone to increased floods or wildfires. Commercial lending to oil and gas companies facing a transition to cleaner energy could be another area of focus in tailored guidance.

But the broader guidance proposed Wednesday provides a starting point for smaller banks to consider climate risks, said Todd Phillips, the director of financial regulatoin at the Center for American Progress, a liberal think tank.

“The principals stated in it are high-enough level that they can be applicable to banks of all sizes, of all business lines,” he said.

Biden Effort

Climate change has been a top agenda item for the Biden administration and federal financial regulators have followed suit.

The Securities and Exchange Commission on March 21 issued a sweeping proposal to require companies, including publicly traded banks, to report the amount of greenhouse gases they emit, their exposure to climate change risks and the emissions produced by companies that use their products.

Federal Reserve Chairman Jerome Powell has also made climate change a focus at the central bank. The Fed recently joined the Network for Greening the Financial System, a panel of global financial regulators, and has started looking at ways to make the banks it supervises plan for climate change.

The Biden administration has run into some trouble getting regulators in place to oversee those efforts. Former Fed Governor Sarah Bloom Raskin withdrew from consideration to be the Fed’s vice chair for supervision amid Republican opposition to her focus on climate change.

But the Fed may join the climate guidance that the FDIC and OCC have proposed, given Powell’s support for climate efforts.

“This is the type of thing that I would hope the Fed, even without a vice chair of supervision, would undertake,” Phillips said.

(Numbered Revision: Adds more details on proposal, reaction beginning in 8th paragraph.)

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com