FDIC issues climate risk guidance for larger banks

The Federal Deposit Insurance Corp. has outlined steps large banks should take to gauge their climate-related financial risks.

The agency, which is moving quickly on the Biden administration’s priorities for financial regulation now that it’s led by Democrat Martin Gruenberg, also said more guidance is in the works.

The FDIC’s 17-page outline resembles guidance that the Office of the Comptroller of the Currency sent out in December. Both apply to banks with more than $100 billion of assets and touch on governance, strategic planning, risk management and scenario analysis.

Drew Angerer/Bloomberg

Gruenberg said that smaller banks, especially community banks, might not have the financial resources and expertise to identify climate-related risks. But he signaled that small banks aren’t off the hook entirely.

“All financial institutions, regardless of size, complexity, or business model, are subject to climate-related financial risks,” he said in a statement.

The FDIC will give more details in the future, the agency said. It plans to issue guidance that would “distinguish roles and responsibilities of boards of directors (boards) and management, incorporate the feedback received on the draft principles and consider lessons learned and best practices from the industry and other jurisdictions.”

“Future guidance will continue to be appropriately tailored to reflect differences in financial institutions’ circumstances, including size, complexity of operations and business model,” Gruenberg said.

Larger banks should consider physical impacts — such as harm to people and property from severe weather events — and risks associated with the transition to a low-carbon economy.

“These climate-related financial risks pose a clear and significant risk to the U.S. financial system and, if improperly assessed and managed, may pose a threat to safe and sound banking and financial stability,” Gruenberg said.

Large banks should also weigh climate heightened risks to low- and moderate-income communities, as well as risks to their reputation, according to the guidance from both agencies.

The Federal Reserve is the only major federal banking regulator that hasn’t issued formalized guidance on climate risk. In October, Fed Gov. Lael Brainard said that the central bank was conducting scenario-analysis exercises to determine the impact of severe weather events on financial institutions.

The Fed did not immediately respond to a request for comment.

Progress at the Fed may be delayed by the lack of a vice chair for supervision. Randal Quarles stepped down from the job at the end of December, and Sarah Bloom Raskin recently withdrew as the nominee to succeed him. Disagreements over climate policy played a key part in Republican opposition to Raskin’s nomination.

The FDIC has asked for feedback on its outline within 60 days.