Groups Call on Financial Regulators to Oversee Banks’ Climate Risks

WASHINGTON, D.C. – Public Citizen, the Center for American Progress, the Natural Resources Defense Council, the Sierra Club, Friends of the Earth US, and Americans for Financial Reform Education Fund today called on federal financial regulators to add climate risk to their oversight of the nation’s banks.

In a letter to the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration, the groups urged the agencies to begin pushing banks to address climate-related financial risks caused by both the physical damage from wildfires, floods, and hurricanes, as well as the transition away from fossil fuels.

To address these threats, the groups called on regulators to immediately issue supervisory guidance on how banks should account for climate risks. The letter provides several recommendations that regulators can use in drafting their guidance.

“It is urgent that you begin examining banks for climate-related risks and make sure they are aware of the potential consequences of not adapting their activities to these risks. You must promptly provide specific guidance to banks that discusses both the physical and transition risks of climate change; details specific issues that examiners will consider, measure, and evaluate; and provides banks with clear expectations. Issuing clear guidance for banks and examiners on expectations for climate-related risk exposure is a necessary first step regulators must take: one that many banking regulators around the world have already implemented and have found in doing so that banks are falling short on prudent climate risk management,” the letter reads.

Addressing climate-related financial risks falls squarely within the statutory mandates for federal banking regulators, the groups noted. Climate change creates credit risk, market risk, liquidity risk, and operational risk to financial institutions – and most financial institutions do not factor climate risks into their risk analyses or planning. (For more details, see the recommendations transmitted with the letter.)

Federal bank examiners routinely review the assets and practices of the institutions they regulate to identify “unsafe or unsound” bank activities that put the banks and the banking system at risk. Federal examiners can order banks to stop risky activities, divest risky assets, and bring their lending activities in line with regulators’ expectations. The groups urged federal regulators to start taking these steps to address the growing dangers from climate change.

Public Citizen has previously called for greater supervision of bank climate risk taking as part of its Climate Roadmap for U.S. Financial Regulation.