Fed proposes framework addressing climate-related financial risks for large banks

Large banking organizations with more than $100 billion in assets are the focus of a set of principles proposed by the Federal Reserve Friday that address the physical and transition risks associated with climate change, the Fed said.

The Federal Reserve Board – which issued the proposed principles on a vote of 6-1, with Gov. Christopher Waller dissenting – said the principles would provide a high-level framework for the safe and sound management of exposures to climate-related financial risks for Fed Board-supervised financial institutions with more than $100 billion in assets.

The Fed said the principles would cover six areas: governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement and reporting; and scenario analysis.

“The proposed principles are substantially similar to proposals issued by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation,” the central bank said, “and the Board intends to work with those agencies to promote consistency in the supervision of large banks through final interagency guidance.”

The proposed principles will be out for a 60-day comment period following their publication in the Federal Register.

Gov. Michelle Bowman, in a statement, said she supported issuing the proposed principles for comment but would reserve judgment about their eventual adoption. Waller, in his own statement, said he disagreed with the premise that climate change “poses a serious risk to the safety and soundness of large banks and the financial stability of the United States” and that the Fed’s stress tests show banks to be resilient under “extremely severe” (hypothetical) macroeconomic shocks.

The Fed, in its notice for the Federal Register, said the draft principles are intended to support efforts by large financial institutions to focus on key aspects of climate-related financial risk management.

“Financial institutions are likely to be affected by both the physical risks and transition risks associated with climate change …,” the Fed wrote. “Physical risks refer to the harm to people and property arising from acute, climate-related events, such as hurricanes, wildfires, floods, and heatwaves, and chronic shifts in climate, including higher average temperatures, changes in precipitation patterns, sea level rise, and ocean acidification. Transition risks refer to stresses to certain institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes that would be part of a transition to a lower carbon economy.

“Weaknesses in how financial institutions identify, measure, monitor, and control potential climate-related financial risks could adversely affect financial institutions’ safety and soundness, as well as the stability of the overall financial system,” it continued. “The Board is therefore seeking comment on draft principles that would promote a consistent understanding of how climate-related financial risks can be effectively identified, measured, monitored, and controlled among the largest institutions, those with over $100 billion in total consolidated assets. Many financial institutions are considering these risks and would benefit from guidance as they develop strategies, deploy resources, and make necessary investments to manage climate-related financial risks.”

Federal Reserve Board invites public comment on proposed principles providing a high-level framework for the safe and sound management of exposures to climate-related financial risks for large banking organizations

Notice for Federal Register