Bank Climate Guidance Faces ‘Deep Distrust’ From Small Lenders

Federal regulators will have a hard time assuring banks that recent climate guidance applies only to the largest financial institutions, in part due to a long history of distrust between the industry and its Washington supervisors.

The Oct. 24 guidance from the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency seeks to get banks with at least $100 billion in assets to better manage the material risks posed by climate change. That includes both physical risk to bank branches as well as transition risks as the economy moves away from fossil fuel production.

The regulators repeatedly stressed that the nonbinding guidance isn’t intended to influence how banks allocate credit to different industries, including loans to oil, gas, coal, and other fossil fuel-related businesses. They also attempted to reassure smaller banks they would be judged on a different standard.

So far, however, those assurances have fallen flat.

For starters, the preamble to the guidance mentions climate risks shared by all banks, leading to concerns that supervisors will quietly apply the guidance to smaller lenders.

Then there’s a deeper issue of trust. Many bankers still have scars from Operation Choke Point, an Obama-era program under which the Justice Department and federal supervisors allegedly pushed banks to stop lending to gun stores, payday lenders, and other legal businesses on grounds of reputational risk.

“The bank regulators will have a hard time convincing banks that they’re serious about this not being binding because there’s just deep distrust between banks and their regulators,” said Todd Phillips, a professor at Georgia State University’s Robinson College of Business and a former FDIC attorney.

Risk Focus

The new climate guidance, which takes effect upon publication in the Federal Register, is meant to help banks with $100 billion or more in assets to manage the material risks to their balance sheets posed by climate change.

A major focus of the guidance is risk management, including the credit risk posed by loans to companies involved in fossil fuel industries, and to communities that are potentially at risk due to increased flooding, heat waves, and other climate change effects.

“The core thing to understand about this guidance is that this is not about how banks’ activities may contribute to climate change; it’s about how climate change affects the banks,” said Stephanie Jones, a senior attorney with the Environmental Defense Fund.

The guidance specifically states that it’s intended not to influence who banks lend to, but rather to ensure they properly assess the risks of those loans.

Regulators drove home that message in public statements about the guidance.

“The principles do not tell bankers what customers or businesses they may or may not bank,” Acting Comptroller of the Currency Michael Hsu said in a statement at an Oct. 24 meeting to approve the guidance.

Hsu’s statement was met with serious doubts from both bank officials and Republican regulators.

Republican members of the FDIC board voted against issuing the guidance, as did two Trump appointees on the Federal Reserve’s board of governors.

“This is all about getting bank regulators involved in the pricing and allocation of capital,” said Jonathan McKernan, an FDIC board member and former Republican Senate Banking Committee staffer who opposed the guidance.

Trickle Down

Even though the guidance is supposed to apply only to the 36 banks with $100 billion in assets or more, according to federal data as of June 30, the Independent Community Bankers of America came out with a statement sharply opposing it.

“ICBA remains concerned that the true aim of the principles is to choke off legal but disfavored industries from the financial system, and that community banks may also be expected to comply with today’s large bank guidance,” said Rebeca Romero Rainey, the group’s president and CEO.

Small lenders say federal supervisors have pressured them to comply with guidance meant for larger banks, said Matthew Bisanz, a Mayer Brown LLP partner who advises financial institutions on regulatory issues.

While larger banks spread across the country may have an easier time balancing their climate risks, smaller banks may not have that option when pushed by supervisors, he said.

“The ICBA is right to be concerned that this will trickle down to smaller banks, particularly with those that have specific geographies,” Bisanz said.

Although the regulators say that they’re not trying to influence credit decisions, the mere fact that they’re telling banks to weigh the material risks of those credit decisions will have an impact, said Brian Knight, a senior research fellow at George Mason University’s Mercatus Center.

“It inevitably raises scrutiny of things that smack of climate. It’s going to discourage investment, even if it’s not something the regulators want,” he said.

Choke Point Hangover

Adding to the concerns about trickle-down regulation is the history of Operation Choke Point, which saw banks sue the Fed, FDIC, and OCC to stop efforts by regulatory supervisors to influence loan decisions. FDIC Chairman Martin Gruenberg also served as the agency’s leader during the Choke Point period.

“It’s important to know that the key regulators here are people who have spent their whole careers in government or government adjacent, and not working at a bank or a bank’s law firm. So banks just really mistrust who’s in office right now,” Phillips said.

Of special concern is the banking regulators’ focus on the risk that fossil fuel businesses may lose out with the transition to solar, wind, and other renewable energy sources.

“It’s hardly a stretch to say that transition risk is increasing for those largest banks,” said Anne Perrault, the senior climate finance policy counsel at Public Citizen.

But transition risk is somewhat of an amorphous concept, Knight said.

“There’s always the concern, and there should always be a concern, that bank regulators are going to use this opaque but very strong power they have to shape the system to their preference,” he said.

Still, most big banks are already doing much of what the climate guidance urges, Perrault said.

“I’m really having a hard time understanding why banks think this is such a threat,” she said.