NY Warns Against New Redlining in Proposed Climate Risk Guidance

New York wants banks and independent mortgage companies it supervises to undertake regular scenario analysis and other measures to help quantify and protect against risks posed by climate change, but warned against cutting lending to vulnerable communities.

The New York Department of Financial Services on Wednesday issued proposed guidance outlining how it wants banks and mortgage lenders and servicers to consider the physical risks of increased severe weather, rising sea levels and the economic risks of a transition away from a fossil-fuel based economy.

The agency also warned banks and mortgage companies to avoid a cut in lending or increased costs of credit in minority and low- to moderate-income neighborhoods that might face heightened climate change risks.

The 13-page proposed guidance outlines the types of tools banks and mortgage lenders should deploy to measure and protect against climate change risks.

These include using regular scenario analyses – a review of a bank’s assets and liabilities similar to stress tests but with a more long-term outlook that tries to take into account unknown future risks. The guidance also proposes compiling other data about potential damage to physical structures and losses on investments and loans in neighborhoods or industries vulnerable to climate change.

The DFS guidance notes that quantifying climate-related financial risks “is a developing area with data and measurement challenges.”

Because of that, the DFS says that companies it oversees, including many of the US branches of some of the world’s largest foreign banks like Deutsche Bank AG, Barclays Bank PLC and Credit Suisse AG, “may wish to take an iterative approach that leverages further developments in methodologies and improved data availability.”

The DFS wants banks to measure liquidity, credit and market risks posed by climate change, and warned that banks and mortgage lenders should plan for insurance coverage to either become more expensive or eliminated entirely in areas where climate risks are prevalent.

The DFS, which also regulates New York insurance companies, issued climate guidance for insurers in November 2021.

Climate Redlining

The guidance for banks and mortgage lenders also warns banks against using climate risks as an excuse for cutting back on lending and investments into low- to moderate-income communities that, because of past redlining practices, may see more damage from climate change.

New York updated its Community Reinvestment Act in 2021 to give banks and independent mortgage lenders credit for investments in climate mitigation efforts in low- to moderate-income communities.

The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are considering giving similar credit as they overhaul the CRA, a 1977 anti-redlining law, at the federal level.

Those same federal regulators are currently developing their own climate guidance, but federal regulators are focusing on banks with $100 billion or more in assets.

New York’s proposed guidance would apply to all banks and mortgage lenders the DFS oversees, including community banks with $10 billion or less in assets. The proposed guidance provides flexibility so that smaller banks don’t have to use some of the more complex, and expensive, tools that larger banks will.

But New York’s proposed guidance could be a marker for other agencies looking to get small banks to measure climate risks, said Todd Phillips of Phillips Policy Consulting LLC, a financial regulatory consulting firm, and a former FDIC official.

“The fact that there is one state doing this for all institutions can show that it can be done for smaller institutions,” he said.

New York Superintendent of Financial Services Adrienne A. Harris represents state regulators on the Financial Stability Oversight Commission, a panel of federal regulators led by the Treasury Secretary that is currently examining climate risks.

Deadlines for comments on New York’s proposed climate guidance is March 21.