Both the FDIC and the OCC have signaled in recent weeks that they expect community banks to begin understanding their climate-related risks “in the near term.”
FDIC Acting Chairman Martin J. Gruenberg told the American Bankers Association annual conference on Oct. 3 that community banks must begin the process “to better understand and consider their own unique climate-related financial risk and how it may impact them.”
To start, he suggested that boards and senior management get a better handle on how climate change might affect the bank’s “business, customers, and communities, and how this risk may evolve over time.” Last year, the OCC told bank boards to begin asking five questions about climate change risks.
Gruenberg suggested that community banks “consider developing appropriate sound governance frameworks and processes that have the capability for incorporating the assessment and management of climate-related financial risk as appropriate to their size, complexity, and risk profile.”
Acting Comptroller of the Currency Michael J. Hsu has made similar remarks. The OCC’s 2023 supervisory priorities, which were released on Oct. 6, include climate-related financial risks.
“There is an urgent need for action,” Hsu said in a speech in September. He acknowledged that many community banks are concerned about regulatory actions regarding climate change. He said he would listen carefully to their concerns “and provide more clarity on the commonsense approach we are taking to climate-related risk management.”
Bank regulators are not in charge of climate policy and will not be “involved in determining which firms or sectors financial institutions should do business with,” Gruenberg said. But he said they do want banks to take a risk-based approach when assessing their credit and investment decisions.
For instance, banks will need to assess transition risks from climate change in the future. The global push to reduce carbon emissions is changing investor and public behavior, and banks will need to take that into consideration.
While the focus on climate-related risk management has been on large banks, both the FDIC and OCC have said that community banks must also understand their risks.
Community banks have lobbied against inclusion in any mandate that includes climate stress testing. But Hsu indicated that future climate scenario analyses may be quite different than capital stress tests. “I believe a clean sheet of paper and an open mind to considering a wide range of risks and scenarios will yield richer and more actionable information than an approach that borrows heavily from capital stress testing,” he said.
Gruenberg stressed that climate change is an issue for banks of every size. “Climate-related financial risk presents unique, serious, and unknown risks to all banks of all sizes, regardless of complexity or business model. Some banks may have more concentrated exposures, regardless of asset size, and, for such institutions, the impact of climate-related financial risk may be greater,” he said.
He and other regulators view climate change as a safety and soundness issue. “Simply put, it’s just good governance to be prepared. And we can prepare now,” Gruenberg said.
An Invictus white paper explores the regulatory push for climate change risk management in more depth. Invictus has developed a simple suite of climate risk analytics that community banks can use as a starting point. These initial analytics will provide community banks insights into the physical risks their banks may face from climate change, as well as help launch valuable discussions in the boardroom and with bank examiners. Please reach out to climaterisk@invictusgrp.com for more information.