Last week, the US Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) released final interagency guidance outlining principles for climate-related (physical and transition risks) financial risk management for large financial institutions.

In final form, the interagency guidance is substantively similar to the drafts previously released by each of the federal banking agencies, with a few modifications made in response to comments provided, including:

• Clarification on the applicability to banks of varying sizes. The agencies recognize that financial institutions may have material exposures to climate-related financial risks, regardless of size, but they say these principle apply specifically to large financial institutions with over $100b in total assets.
• Clarification on the role of boards of directors and management. Boards are expected to be aware of the impact of climate-related risks on the institution, oversee it, and allocate resources to support climate-related risk management, while holding management accountable for adhering to established frameworks.
• The expectation that climate-related risks will be baked into existing risk management frameworks. Plus an expectation that firms will use and adapt their reporting, monitoring and escalation processes to measure and control risk exposure. The specific legal and compliance risks cited by the guidance include assessing changes in the legal and regulatory landscape due to climate-related risks, plus the expectation that firms will be vigilant about any potential for discriminatory impacts from risk-mitigation measures.

The integration of climate-related risks into risk management is expected to evolve over time and adapt to new developments and methodologies; risk management practices are expected to be scaled to the size, complexity, and risk profile of the financial institution.

“These principles recognize that industrial policy and climate policy are outside of the scope of bank safety and soundness and do not tell bankers what customers or businesses they may or may not bank.”

Michael J Hsu, Acting Comptroller of the Currency

Statements by regulatory chiefs

“The principles are intended to provide guidance to large financial institutions as they develop strategies, deploy resources, and build capacity to identify, measure, monitor, and control for climate-related financial risks,” said Martin J Gruenberg, Chairman of the FDIC.

“[T]hese principles recognize and respect that industrial policy and climate policy are outside of the scope of bank safety and soundness. The principles do not tell bankers what customers or businesses they may or may not bank. Rather, they clarify how large banks can maintain effective risk management and keep their balance sheets sound and continue to be a source of strength to their customers and communities through a range of scenarios,” said Michael J Hsu, Acting Comptroller of the Currency.

“We are already seeing certain cracks in the system, such as the recent mass cancellations of homeowner’s insurance policies due to climate-related risks. Banks, in particular, play an essential role for the functioning of society, and it is critical that they be able to meet the changing financing needs of their communities, and serve small businesses and households in times of stress or in the wake of a catastrophic event,” said Rohit Chopra, Director of the Consumer Financial Protection Bureau, and a member of the FDIC’s Board of Directors.