Small banks are gearing up for a fight with the state of New York's top banking regulator, who on Wednesday proposed guidance to guard against the risk of loans going underwater due to climate change.
The state's Department of Financial Services says its proposed guidance emphasizes a "proportionate approach" as it prods banks and mortgage lenders to measure and monitor the risks that climate change poses to their loan portfolios.
"Regulators must anticipate and respond to new risks to operational resiliency and safety and soundness, jeopardizing an institution's future," Adrienne Harris, the state agency's leader and a former Obama administration official, said in a
The guidance lays out some expectations for lenders, such as the creation of processes for tracking climate risks, the establishment of internal "lines of defense" to review climate risks and the incorporation of risk analyses into their business strategies.
But the proposal quickly drew criticism from the Independent Community Bankers of America, a national trade group that represents smaller institutions in New York and elsewhere.
"We are deeply disappointed with the … proposed guidance, which in spite of a purported 'proportionate approach,' subjects community banks to the same overly burdensome and costly guidance as the largest national and foreign banking organizations operating in the state of New York," Anne Balcer, ICBA's chief of government relations and public policy, said in an emailed statement.
She also said "resiliency is central to community banks' business model," pointing to underwriting practices stretching back to the early 19th century that factor in severe weather events.
The 13-page guidance, which will be open for public comment for three months, lays out "physical risks" to banks stemming from an increase in severe weather events along with "transition risks." The latter includes the impact on banks' assets if a decline in fossil-fuel prices leads to trouble among their borrowers or sparks a broader financial crisis.
The guidance would apply to state-regulated banking organizations, state-licensed branches and agencies of foreign banking organizations and state-regulated mortgage bankers and servicers, regardless of size. The document recognizes that smaller firms have fewer resources than big ones to build out extensive tracking mechanisms, saying that banks "should take a proportionate approach" depending on their exposure.
Critically, however, the agency declined to exempt small banks from its proposed guidance, and it noted that they are "not necessarily less exposed" to climate change. Small banks "may have concentrated business lines or geographies that are highly exposed to climate-related financial risks without the risk-mitigating benefit of diversification available to larger organizations," the agency wrote.
The document is an "important starting point" that could be an example for other state regulators and federal agencies to follow, said Yevgeny Shrago, policy director at the advocacy group Public Citizen's Climate Program. He credited the agency for applying the guidance to smaller banks, which he said have faced a more lenient approach thus far among federal regulators.
Comptroller of the Currency Michael Hsu, for example,
Harris' agency oversees some major banks in New York, including foreign-owned banks with major operations in New York City, as well as community and midsize banks across the state.
The agency did not immediately respond to a request for comment on the ICBA's statement. In an earlier email, a spokesperson had said that the agency recognizes the institutions it oversees "do not all have the same level of resources to manage these risks and may be at different points in the process" in thinking about climate-related risks.
"For those early in the process of managing climate-related financial risks or with limited resources, their work can start qualitatively, based on existing data and analysis of limited sectors or geographies," the agency spokesperson said.
In announcing the guidance, the agency emphasized it is part of a "dialogue" and that it welcomed input as it worked toward a "proportionate, data-driven approach."
One key part of the guidance, which Harris previewed in a
The agency noted that redlining practices helped make those communities more vulnerable to flooding and heat waves, and that banks "must not unduly harm or disadvantage at-risk communities."
"They should not base their risk management response to climate change on the concept or practice of disinvesting from low-income communities or communities of color or by making credit or banking more difficult or expensive for members of these communities to obtain," the agency said.
The agency said it aimed to align its guidance with the climate-related work at other regulatory agencies in the U.S. or elsewhere.
The agency is taking comments on the proposed guidance until March 23, and it is hosting a webinar on the topic on Jan. 11.
