US Banking Regulators Release Framework for Climate-Related Financial Risks

Federal banking regulators in the United States have unveiled a framework aimed at guiding large banks in managing climate-related financial risks. The framework, jointly issued by the Federal Reserve Board, the Office of the Comptroller of the Currency in the Treasury Department, and the Federal Deposit Insurance Corporation, primarily targets banks with assets exceeding $100 billion.

The regulators noted that large banks are vulnerable to both physical and transitional risks associated with climate change. Physical risks encompass adverse weather events induced by climate change, such as floods, droughts, and natural disasters. Transitional risks pertain to the challenges posed to banks as markets respond to climate change, such as increased clean energy production or new climate-related regulations impacting banks' financial performance.

This comprehensive framework consists of high-level principles addressing six key areas: governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis.

Regarding the release of the framework, Federal Reserve Chair Jerome Powell stated, "Banks need to understand, and appropriately manage, their material risks, including the financial risks of climate change. The guidance issued ... is squarely focused on prudent and appropriate risk management. I am therefore able to support its issuance."

The framework outlines how climate-related financial risks can be incorporated into specific risk areas, covering credit, liquidity, operational, legal, and compliance, as well as other nonfinancial risks.

While banking regulators had previously issued principles for climate-related risk management at large banks between December 2021 and December 2022, the new framework emphasizes that any climate-related risks integrated into banks' risk management programs must be material.

Jerome Powell stressed that the guidance centers on prudent and appropriate risk management and that banking regulators are not attempting to assume the role of climate change regulators, a responsibility he believes belongs to elected branches of government. He added that the framework is not designed to discourage banks from lending to sectors of the economy that some argue contribute to climate change.

It's important to note that not all regulators were in complete agreement regarding the framework. Republican Fed Governor Michelle Bowman voted against it, expressing concerns that it may create confusion regarding supervisory expectations, increase compliance costs, and place additional burdens on financial institutions without necessarily enhancing their safety and soundness or contributing to the financial stability of the United States.

By fLEXI tEAM