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Climate Risks and Financial System Protection

Climate Risks and Financial System Protection

Managing Climate Risks to Protect the Financial System

Photo by Matt Palmer at Unsplash

First the Office of the Comptroller of the Currency, and now the Federal Deposit Insurance Corporation. Federal regulators have responded from NGOs SenatorsIt is important to take into account climate risk when bank supervision is being performed.  This is good news for investors, banks’ stability and our economy.

Both banks supervisory institutions have issued guidance to help manage climate risk exposures for large institutions and ensure the safety and soundness of the financial sector. The Securities and Exchange Commission (SEC), has also issued guidance. Proposed ruleAmendments that would require registrants give climate-related information, which will help investors understand the risks that climate change poses to their businesses.

These foundational first steps recognize this. Climate change presents significant risks for the financial system.  Supervisory guidance lets banks know that their bank regulators—and specifically the bank examiners that look at their records and ask questions to make sure banks are following safe practices for the health of the bank—expect each bank to include climate risk in their risk management analysis and practices.

Previously, OCC created the Principles for Climate-Related Financial Risk Management for Large Bankson December 16th 2021, and was received feedback,NRDC also has information on the principles that support the identification of and management climate-related financial risk by banks with more $100 billion in total consolidated assets. 

The FDIC now follows the OCC’s lead and issues its own request to information Principles for Climate-Related Financial Risk management for Large Financial InstitutionsThese guidelines, which are similar to that provided by the OCC, were designed for banks with more $100 billion in total consolidated assets. The Federal Reserve Bank, which is the last bank regulator, should follow suit and soon issue its own version.

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These guiding principles will be finalized. Similar guidance should be developed for all banks regardless of asset size. While we understand that oversights and guidance will begin with the largest banks, it’s important to expand guidance and oversight to all size banks in the near future. Smaller banks can be better prepared for the future by providing clear guidance and a timeline. 

However, the FDIC/OCC have taken a necessary, important step to protect individual bank and the entire financial system against the risks of climate changes. Recognizing the importance of climate change for safety and soundness, regulators must ensure that banks are aware of the risks they face.

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