Groups call on federal regulators to urge banks to assess climate risks
WASHINGTON – Federal regulators should immediately add climate risk to their oversight of the country’s banks and urge banks to start tackling the risks of climate-related damage resulting from wildfires, floods, hurricanes and the transition of industries dependent on fossil fuels, according to a letter and advice sent today to banking regulators by the NRDC and a coalition of leading environmental, financial and public interest groups.
In the letter to federal bank regulators, Americans for Financial Reform Education Fund, Center for American Progress, Friends of the Earth US, Public Citizen, NRDC (Natural Resources Defense Council) and Sierra Club noted that climate change creates a risk of credit, market risk, liquidity risk and operational risk for financial institutions, and most, if not all, do not currently factor risks into their regular valuation plans.
The groups argue that managing the climate risk facing banks fits perfectly with the statutory mandates of federal regulators, which include the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the National Credit. Union Administration.
They called on regulators to issue prudential guidance to banks on how to manage and report on their climate risks. The groups provided recommendations that regulators could use in drafting these oversight guidelines. For example, their letter explains how the particular weather risks that banks may face could affect their traditional risk categories: credit risk, market risk, liquidity risk and operational risk.
They write, in part:
“It is urgent that you start looking at banks for climate-related risks and make sure they are aware of the potential consequences of not adapting their business to these risks. You need to provide bank specific advice quickly that addresses both the physical and transitional risks of climate change; details the specific issues that the examiners will examine, measure and assess; and provides banks with clear expectations.
“Publishing clear guidance for banks and examiners on expectations for exposure to climate-related risks is a necessary first step for regulators to take – a step that many banking regulators around the world have already implemented and have found in doing so that banks do not achieve a prudent climate. risk management”
The groups noted that federal bank examiners routinely review the assets and practices of the institutions they regulate to identify “dangerous or unhealthy” banking activities that put banks and the banking system at risk. Federal examiners can order banks to stop risky activities, sell risky assets, and align their lending activities with regulators’ expectations. Federal regulators should start doing the same to deal with the growing dangers of climate change.
The groups information sheet, “Recommendations for Supervisory Boards of Banking Regulators,” is here.
An NRDC blog on the issue is here.
The text of the group letter to regulators follows:
The Honorable Randal Quarles The Honorable Jelena McWilliams
Vice-president of supervision President
Federal Reserve System Federal Deposit Insurance Corporation
The Honorable Todd Harper Michael Hsu
President Interim Controller of the Mint
Department of National Treasury Credit Union Administration
Dear Vice President Quarles, President McWilliams, President Harper and Controller Hsu:
We are writing to urge you to take swift action to address climate risk for individual banks, bank holding companies, and credit unions (collectively, banks) under your jurisdiction. Recent climate science reports have confirmed the link between climate change and the increasing frequency and severity of physical disasters, which can pose risks to banks. The European Central Bank’s preliminary findings from its own prudential review, for example, show that most of its banks are unprepared for today’s climate impacts, let alone the greatest threats of tomorrow. To address these developing threats, we encourage you and your bank examiners to integrate climate risk into your branch’s regular reviews. Right now, we encourage you to publish prudential guidelines detailing the specific issues that banks and your examiners will need to consider, measure and assess.
Your examiners regularly review the assets and practices of the institutions they regulate to, at a minimum, identify the activities or assets of banks that are “unsafe or unsafe”1 and can pose unjustified risks to institutions and the banking system.2 They can order banks to stop these risky activities, divest themselves of these risky assets and bring their lending activities into line with regulators’ expectations. In addition, the reviews allow supervisors to learn about the activities of banks and collect data on the industry as a whole. Banking regulators regularly issue prudential guidelines that identify the types of activities that may be unduly risky or that may create contagion risk and systemic risk, and provide banks with expectations on how to mitigate these risks.
The examiners regularly assess credit risk, market risk, liquidity risk and operational risk. Each of these risks (and others) are implicated by climate change. Banks are exposed to climate-related risks from acute and chronic physical damage and productivity losses (physical risk) as well as the ongoing transition of high-carbon industries driven by regulation, technology, preferences consumers and growing legal liability (transition risk). It is part of your mandate as prudential regulators to integrate climate risk into your assessments, just as you consider any
1 See, for example, 12 USC § 1818. See also identifier. § 1844 (c) (2).
2 The failure of banks that engage in too risky activities can cause significant damage that spills over into the real economy. Although Congress has enacted laws to curb banking industry excesses, regulators are expected to review their institutions at least every 18 months to ensure compliance. 12 USC §§ 1820 (d), 1756.