Proposed FDIC principles outlined for management of climate-related financial risks at large banks; small banks get a break, for now

Management of exposures to climate-related financial risks at large banks are the focus of draft principles to provide a high-level regulatory framework under a proposal issued Wednesday by the federal bank deposit insurance agency.

Comments are due in 60 days following publication in the Federal Register.

The Federal Deposit Insurance Corp. (FDIC) said in its proposal that all financial institutions of all sizes may have material exposures to climate-related financial risks. However, the agency said, the proposed principles are intended for banks with more than $100 billion in total assets, developed, it added, “to support efforts underway by large financial institutions to consider key aspects of climate-related financial risk management.”

In a statement accompanying the proposal (as outlined in a press release), Acting FDIC Board Chairman Martin Gruenberg said smaller financial institutions, especially community banks, may lack the financial resources and expertise necessary to effectively identify and measure climate-related financial risks. He said to alleviate burden to smaller financial institutions, “at this time,” the principles would only apply to the larger institutions.

In the release, the FDIC asserted that weaknesses in how financial institutions “identify, measure, monitor, and control the financial risks associated with a changing climate could adversely affect a financial institution’s safety and soundness, as well as the overall financial system.”

The draft principles, the agency said, would help financial institution management make progress toward addressing key questions “as they consider incorporating climate-related financial risks into their institutions’ risk management frameworks.”

Additionally, the agency said it encourages financial institutions to consider climate-related financial risks in a manner that allows them to continue to prudently meet the financial services needs of their communities.

The principles essentially cover nearly all risks managed by large banks, specifically listing credit, liquidity, other financial, operational, legal/compliance, and other nonfinancial risks.

“Climate-related financial risks pose a clear and significant risk to the U.S. financial system and, if unmitigated, may pose a near-term threat to safe and sound banking and financial stability,” the proposal states. “Weaknesses in how institutions identify, measure, monitor, and control the physical and transition risks associated with a changing climate could adversely affect a financial institution’s safety and soundness, as well as the overall financial system.”

FDIC Issues Request for Comment on Statement of Principles for Climate-Related Financial Risk Management for Large Financial Institutions